Know the Score – What you need to know about Credit Scores

Your credit score is just one of the pieces of information that lenders (and other creditors like trade suppliers or landlords) look at when considering whether to do business with you. For most people a credit score is a bit like their appendix, they’re pretty sure they’ve got one, but they’d struggle to tell you exactly what it is, and it’s never really a problem… right up to the point where it suddenly is.

Your credit score can have a significant impact on your ability to obtain any sort of debt, and as a consequence a flow-on impact in your ability to start or grow your business. In this article I’m going to try to explain a little bit about how credit scores are calculated, why they matter, and how you can keep better control of yours.

Firstly, what is a credit score? A credit score is simply a number on a scale, usually between 0 and somewhere around 1000 (depending on which company is doing the scoring). The score is just one part of a Credit Report which will also capture things like payment defaults, court actions, bankruptcies and more. Almost every lender or business that feels they’re taking credit risk on you or your business will use that score, along with other information, to decide whether you represent a good risk.

Where do credit scores come from? The overarching term is Credit Reporting Agencies, or Credit Bureaus. In practical terms across Australia and New Zealand that usually means either Equifax (formerly VEDA), Illion (formerly Dun & Bradstreet), or Centrix. These companies collect information about businesses and individuals from a variety of sources, and then charge other authorised users a fee to access that information. It’s worth noting that as an individual you generally have a right to access and correct information held about you (but they might not make it easy).

How did you get a credit score? If you’ve ever obtained any sort of credit, you’ll almost certainly have a credit score with at least one of the Credit Reporting Agencies. This could have been anything from a pay-as-you go phone, to a car loan or mortgage. The very first time this happened your file will have been created with one of the agencies. Believe it or not this is actually a good thing, because having no credit file can be seen as being just as bad as (or sometimes even worse than) having a poor credit file, particularly if you’re out of your late teens. Once you have a credit file, any new enquiries are added to it over time, building up a picture of who you borrow from, how much, and how often.

So, how is the score calculated? Scores differ between businesses and individuals, and none of the credit bureaus will tell you exactly how they calculate their particular score, but some things are fairly consistent:

General Factors – Things like your age, tenure with your current employer, and the amount of time you’ve spent at your current address can all be used as part of assessing your risk profile.

Type of credit – Some types of credit may impact scores more than others. For example, a mortgage enquiry might impact your score differently to a personal loan, and a credit card might be different again.

Number of enquiries – Often referred to as shopping patterns, the number of enquiries and the time period they occur over can impact your score. As a general rule lots of credit enquiries over a short period of a time can have a considerable negative impact on your credit score.

Defaults – This is a big one, if you’ve ever failed to pay a debt and just ignored the problem, then chances are pretty high it will eventually end up on your credit file. The size of the debt, how long ago it was, and what sort of business it was owed to, can all impact your credit score to a greater or lesser degree. The biggest impact however will come from whether the debt was eventually paid or not. Into this category I’d also add things like court writs or default judgements.

And then came Comprehensive Credit Reporting. As you might have gleaned, a significant portion of credit reporting is about things that may reduce your credit score, or what might be termed ‘black marks’ on a credit file, however that is starting to change. Although it’s been around a while (since 2012 for NZ and 2014 for Australia), Comprehensive Credit Reporting (or CCR for short) is still in its infancy. CCR allows for much more information to be collected and shared by credit bureaus, theoretically to give a more balanced view of an individual’s credit history.

With CCR information such as whether you actually obtained credit (rather than just knowing you applied for it), as well as payment history and credit limits can be shared. This is meant to give greater insights into not just how much credit you’ve applied for, or where things have gone very wrong, and instead show if you’re keeping up with all of your commitments and whether you’ve currently taken on what might be considered too much debt.

So, what can you do to protect your credit score / credit file?

The most obvious thing is to make sure you don’t default on your payment obligations. If you have run into financial trouble or a dispute it’s far better to address it before the problem hits your file. Don’t just avoid debt collectors or parties you owe money to, instead try to come to some arrangement with them. Many providers will accept a negotiated settlement for a debt and refrain from listing a default by agreement.

If you do have a default on your file it will have a far greater impact on your credit score if it remains unpaid. Again, you may be able to negotiate a settlement with the party that listed the default, most businesses would rather get some of the debt paid than none of it.

Time may not heal all wounds, but it can eventually heal most things on your credit file. If you’re thinking about starting a business next year but you still have an unpaid default on your file, pay it now. The further back in history a black mark is, the less it will count against you (everyone can change right?).

Limit your shopping around. If you’re looking for finance be careful how many places you apply with, and if you’re working with a finance broker ask them how they minimise the number of enquiries on your file. Most good finance brokers will put in the effort to match your requirements with a lender that’s more likely to approve you, which can make a big difference.

You should also take care with the types of credit you apply for or obtain. Multiple enquiries from credit card providers, short-term lenders, or pay-day lenders can all negatively impact your credit score.

If you can, pay your bills on time. With CCR it’s now more important than ever to make sure that you pay your bills on time. It might not make a big difference if you drag out the bill for last Thursday’s morning tea with the café downstairs, but for things like loans and utilities you can expect they will soon be reporting your ‘Average Late Payment Days’ if they’re not already.

Whilst the scores differ somewhat between them, it’s fair to say that a score below 300 is going to be a significant impediment to obtaining most credit. 300 to 500 will be seen as poor or below average and may make some credit difficult or more expensive. 500 to 700 you’re middle of the road. And up above 700 you’re going to be considered a fairly safe bet.

If you’d like to check your own credit score, you can visit the websites for Equifax, Illion, or Centrix; generally these providers will provide individuals with their own personal credit reports free of charge. And if you do find a mistake impacting your credit file make sure you get it cleared up asap! You never know when you’ll need your credit score, but you definitely want it to be at its best when you do.

– Phil Chaplin, CEO

Business Plans – Why do financiers care? And more importantly, why should you?

There are very few finance companies that are willing to take on the risks associated with start-up businesses, and certainly most banks would rather wait until you’ve got a few years under your belt before they’re willing to consider lending you any money. So how do you go about showing you’re a good bet? It all starts with a plan.

Although I’ve never seen a business plan to fail, I’ve seen plenty that fail to plan (and there’s an old saying that those two things are pretty much the same). A good business plan can make all the difference between obtaining finance and not, but much more importantly a good business plan can be the foundation stone of turning your entrepreneurial dreams into reality. So where do you start?

Firstly, talk to your Franchisor or business advisor and find out whether they have a template you can use. There’s no sense putting all your effort into starting from scratch when what you really need to be interested in is the content. To help get you started I’ve also included a link to a simple business plan template at the end of this article.

Involve others – Don’t fear criticism, it will help you hold yourself to account. If you already have a team or key people involve them heavily in the planning process, from that first cup of coffee where you talk about the idea to the final draft. Not only will you gain useful insights, but you’ll gain commitment and set yourself up for a future where everyone feels responsible for delivering the planned outcomes.

Be realistic – I can’t stress this one enough, in all aspects of your plan you should be realistic. Include contingences (what if’s). What if it takes much longer to get started than you planned? What if your competitor gets to market first? What if you get sick or injured? Don’t just rely on everything going well. Lenders particularly see straight through overly optimistic plans and forecasts.

Keep it simple – Don’t fall into the trap of using technical jargon or itemising every paperclip in your expenses. Set out where you’ve come from (personally and as a business), what is the ownership structure, what products and services you will provide and who will buy them. How are you different from your competitors, and how will you get from where you are now to where you need to go.

Know your customers – Give some insights into the market you serve. What does your typical customer look like? How many do you need? And how big is the pond you’re fishing in? How will you grow your customer base? Explain how your products fit and attract your target market.

No business exists in a vacuum – Be realistic about who your competitors are but take some time to explain why you’re different. Competitors might be direct and indirect. If your business sells sushi rolls and the business next door sells sandwiches then you’re still competitors. You might also benefit from being so close together, for example you might both attract the lunch crowd.

People matter – Provide some insights into your key people or management structure. What experience do people bring and what is their role in the business? How many staff do you need, and have you been realistic about their costs? Don’t forget to pay yourself! If the business will be your only source of income you should include your own costs in your business plan and be realistic about what the business should pay to you, both in start-up phase and once established.

What SWOT? –  Some years ago I presented a SWOT as part of a business plan. Somebody asked me Isn’t that a bit old fashioned? Maybe, but I still haven’t found a more succinct method of setting out and focussing on your Strengths, Weaknesses, Opportunities and Threats. Perhaps most importantly I find that once you start categorising things in that way it causes you to be quite real with yourself and to test and challenge the things you think you know. Sometimes ‘Opportunities’ seems like the hardest part to get started, but don’t ignore it! Once you start thinking about all the ways you can establish, grow and improve upon your business it can be hard to stop. If you do nothing else in your plan, do a good SWOT! Actually, please don’t just do a SWOT, at least do a SWOT and a good Financial Forecast. Those two things alone can help set you up for success.

I’ve never met a forecast I didn’t like – It’s a bit of a running joke for anyone that’s seen a lot of financial forecasts, they very rarely forecast doom and gloom but will often have what we call a ‘ski-jump’ trajectory, where things start off ok, then some magic happens, and suddenly revenue and profit reach for the stars. Sometimes that does happen, but honestly it’s rare and it’s also probably not preferred. Instead, what financiers (and investors) want to see are realistic numbers, well thought out, with a contingency around key aspects such as customer numbers and revenue.

You should provide at least two years of financial forecasts with at least a Profit & Loss Statement and a Cashflow Forecast. For many, the Cashflow Forecast is an afterthought but it is perhaps the most important of all of the financial forecasts. Businesses might forecast and expect a loss in their first year, but typically when you run out of cash it’s game over.

Make sure your forecasts align to your business plan, and that your assumptions around expenses make as much sense as those made for revenue. It’s amazing how many plans forget that as you grow you’ll often need to add staff, or increase software costs, or move into bigger premises, or all of these things and more.

And that’s it (almost) – Once you’ve prepared your plan, reviewed your plan, shared your plan, tweaked your plan, it’s time to work the plan. Don’t just pop it in the drawer. You should be looking at the key aspects of your plan every month, reviewing how you’re traveling in more detail every quarter, and revising your plan every year. Your business plan is now a living and evolving roadmap to your continued success.


You can find Business Plan and SWOT Templates on our website here







Obtaining Finance, Inflation and Rising Interest Rates – What you need to know

What is inflation anyway? Put simply ‘inflation’ is the rise in costs of goods and services over time. High inflation means the price of things is going up fast, low inflation and prices are going up slowly. Inflation is significantly driven by supply and demand, if demand is high and supply is low then prices will rise.

When supply issues flow into the most basic commodities (think energy in the form of oil and gas) those price increases can quickly spill over into almost everything. Take food for example; as the cost of farming, shipping, refrigerating, and selling food goes up it hits everybody’s hip pocket, now people need to be paid more just to afford exactly the same groceries they bought last week. Money, in terms of what it can buy for most people, is worth less than it was a week ago.


Why are interest rates going up? At its heart, raising interest rates is designed to discourage some consumer and business spending, the theory being that if you can restrict demand then supply can catch up and things can come back into balance. Of course, you can only restrict the supply of necessities so much, but when the RBA raises interest rates they hope that enough people will restrict their spending (or not have money to spend) that it makes a difference.


What does all this mean when you’re starting a business or borrowing money? Firstly, it’s important to recognise that one of the factors that drives inflation is high consumer spending. Part of what the central banks are trying to do by raising interest rates is to ‘normalise’ consumer spending and reign-in what they consider to be excess. Unemployment is low, wages are starting to see real growth because of the tight labour market, and people still have money to spend. Central banks don’t want to stop spending, they just want to limit some of the factors that drive up prices.

Secondly, we need to remember that life goes on even in times of rising inflation. Depending on their target markets, and the goods or services they supply, there are a range of strategies that businesses can apply to address the impacts of inflation. If you’re starting a franchise business the first question to be asking your franchisor is “What strategies are in place (or are being considered) to combat the impacts of inflation?

Here’s a few things to consider (whether you’re already in business or planning to start one):

  • Raise Prices… Now some of you might be thinking, ‘hey wait a second, aren’t rising prices the problem?’ – Yes and no. In times of inflation people expect prices to be increasing. One of the things driving inflation right now is spending power, people have money to spend, and supplies of certain things are limited. Small and medium businesses are often the last to raise prices, thinking they’re protecting their customers. The big players in town have no qualms about raising prices and/or looking to increase their margins.

If you prepared your business plan a few months ago, go back and review your assumptions. Are your costs right? Is your sell price right?

  • Prioritise your most profitable products and services… It’s always worth looking at your product range and making sure you’re focused on delivering those things which give you the best margin. Highlight ‘specials’ based on what works for you, actively cross-sell, up-sell, or alt-sell. Check over your product range and make sure you’re positioned for the best margin. Everyone knows the story of American Airlines saving $40,000 per year by removing one olive from each salad. Find your olives!
  • Remember, not everything inflates at the same rate… Whilst economists distill inflation down to a single number, obviously not everything increases in price at that rate. Seasonality still matters, an over or under-supply of products due to external factors (flood, war, etc.) still makes a huge difference to the price of certain things. Many of these things can change very quickly. It’s important to look for value and to not simply assume that everything is or always will be more expensive.


What about borrowing money? How do rising interest rates impact borrowers?

  • The Official Cash Rate… It’s true that interest rates are rising, they’ve gone up already and they will continue to rise. Just this morning I heard the news radio talk about the stock market, the economy, and “these high interest rates”. The official Cash Rate in Australia as I write this is 0.85%, in New Zealand it’s 2.00%. Objectively, neither of these are ‘high’. They’re also only a fraction of the cost of funds for any borrower.

The rates most businesses pay for loans are far more influenced by the risk assessment that applies to them specifically, to their industry, and to the nature of their transaction. This isn’t to say that the cost of borrowing isn’t going up, but metrics like the Official Cash Rate should be considered in context.

  • Lock in your borrowing power… As interest rates rise the amount that a customer can borrow will often reduce. This is because most lenders look at historical earnings only, and then consider how much you could repay if your earnings stayed the same. To make matters worse, if you’re not looking at fixed rate funding the lender will build in a buffer in case payments need to be increased. In times of rising interest rates that buffer gets bigger and your borrowing power goes down. In short if you’re confident in your business opportunity, it may not pay to wait to seek a finance approval.
  • How inflation can help… A significant amount of business lending (particularly for terms of five years or less) is done on fixed rates. That means your payments never change for the term of the loan even if interest rates increase. This fixed rate funding becomes really important when you consider the impact of inflation…

Consider ‘normal’ inflation is say 3%, and we’re a company selling cups of coffee. Our coffee shop takes out a loan with fixed repayments of $200 per week over 5 years. We sell coffee at $4.00 a cup today, but we put our prices up in-line with inflation (3% every year). By the time we get to the last year of our loan we’re selling coffee for $4.50 per cup, but our loan repayments are still fixed at $200 per week. If inflation is higher we will put our prices up more but our fixed rate loan stays the same, a hedge against inflation.


What will bring inflation (and interest rates) under control?

We can expect inflation will return to ‘normal’ when supply and demand come back into alignment. An overall increase in economic activity can also bring inflation down, but there’s little doubt that much of the sharp inflation we’re seeing now is caused by a range of chronic supply issues in the face of sustained high demand. It’s easy to blame Covid, or Russia, or floods, or El Nino, but ultimately it’s no one thing causing high inflation, and it’s no one thing that will bring it back down again.


As a final thought, it’s important to remember that inflation is actually normal (much as some news outlets might try to make us believe otherwise, remember bad news sells best). Zero inflation is an abnormality in our economic system (Official Cash Rates of nearly zero aren’t normal either). In mid-1985 base interest rates were about 16% and going to see Top Gun at the movies would set you back around $5. Here we are some 35+ years later, movie tickets still seem a bit steep to me (and don’t get me started on the price of popcorn) but I’ll be in the middle of the theatre next week with Tom, doing Mach 2 with what’s left of my hair on fire, and happy enough to pay the price… inflation be damned.

Accessing Business Finance With No Property Backing

There is no doubt that access to funds has been a major barrier to small business ownership for a long time, and over the fast few years the complex application requirements of the big banks have become more restrictive. Recently, the Australian Bureau of Statistics reported that 1 in 3 Australians don’t own a home. The increasing volatility of the country’s property market means that home ownership is becoming increasingly unattainable, and further those who do own property are struggling as property values fluctuate.

Even though 60% of small business owners are looking for funds to grow their business, the concern of property backing is becoming an increasing challenge. This is where non-bank lenders and alternative finance providers can help. Whilst such lenders have always played an important role in bridging the gap between the offerings of traditional banks and the varied needs of small business owners, their role in Australia’s lending landscape is becoming more important than ever.

Non-bank lenders are experiencing a steep rise in adoption rates. Though many are unable to compete with traditional providers on interest rate, they offer a wealth of other benefits which appeal to small business borrowers. Quicker and simpler application processes, reduced paperwork, flexibility and transparency were among some of the favour characteristics of alternative lenders. However most notably, non-bank lenders willingness to secure against business assets rather than personal property assets has been a key differentiator.

Whilst banks are still resistant to offer business loans which don’t take personal property as security, the flexible funding options of non-bank funders are more aligned with the circumstance of many of Australia’s small business owners. Whilst it is likely that borrows will have to compromise on rate, studies found that this is not a major concern. A recent SME Growth index found that a hopping 91% of SMEs would be willing to pay a higher interest rate to avoid using their home as security. This percentage reflects the impact that Australia’s property market is having on business owners.

The key takeaway is that if you are not a homeowner, or you don’t want to risk your home as security, there are options out there to suit you. Whilst banks and traditional lenders are a staple of Australia’s lending landscape, small business owners should consider non-bank and alternative funding sources that may be a better fit for their business finance needs.