Bad credit isn’t the end of the world, no matter how much it feels like it. Balancing debts and applying for loans is part-and-parcel for any small business, and somewhere in the weeds of it all is a particular number that can either make your life a little easier or a big ol’ pain in the bum. To help us sort through the mess of credit scores – what they are, why a good one matters, and how to improve yours – we picked the brain of financial counsellor and debt whizz Rosemary Steinfort.

GOT CREDIT? In simple terms, a credit score (or a credit rating) is a number that lenders use to decide whether they will offer you a loan. Rosemary explains that credit scores are “calculated from information that is in your credit report, which may include the amount of money you’ve borrowed, the number of times credit has been applied for, and if you have paid your loan repayments on time”. If you’re running a small biz, any personal credit scores you have are separate from your business credit score. If you’ve ever applied for a personal loan (including credit cards and Buy Now, Pay Later schemes), you’ll have your own individual credit report. Small businesses, Rosemary says, “will also have a credit report which may be used by lenders and suppliers to determine if the business is creditworthy and to work out the risk level of the business”.

Every payment you’ve made over the last two years will show up on your credit report. This can include credit cards, loans and bills, even if you’ve paid them on time. However, if you have any payments of 150 bucks or more that are overdue by 60 days or more, these bad boys will stick around on your report for five years, even once you’ve paid them off. Applications for things like credit cards, store cards, home loans, personal loans and business loans will also stay on your report for five years.

CREDIT WHERE CREDIT IS DUE Good things come with good credit. Or, at least, they become a little easier. If your small biz has a good credit rating, you’ll be able to access loans and suppliers more easily. “A higher credit rating, which means the borrower is less risky, may be advantageous in accessing credit with a lower interest rate or better terms from a supplier,” Rosemary explains. It’s vital to note that potential lenders may also look at the individual credit report of the owners or directors of a biz in addition to the business’ credit report when deciding if they will provide credit – so it’s best to have good credit all round.

WHAT BAD CREDIT MEANS OK, so your small-biz credit report isn’t as awesome as it could be. How does that actually affect your business? Rosemary says that a bad credit score could impact your ability to borrow money or set up an account with a supplier, as well as potentially impact the ability to borrow from a bank. This may mean that borrowers might have to apply to non-bank lenders, which typically charge higher interest rates. “Most lenders will either refuse credit or may charge higher interest rates if a borrower has a poor credit score, due to their perception that the borrower is riskier and may default on the loan.”

HOW TO IMPROVE YOUR CREDIT Fret not, faithful biz owner, for having a bad credit score is only an opportunity to build a better one. There are a handful of ways you can go about improving your credit score, and so many of them boil down to simply staying organised. The Australian government’s small-biz website, Moneysmart, suggests that lowering your credit card limit is a great place to start in improving your credit score. You can’t spend what you don’t have access to! Rosemary says that simply paying your loans, credit card, rent, mortgage and utility bills on time is vital to improve your credit. This means not defaulting any payments, forcing you to stay on top of your small-biz financials. Limiting how many applications you make for credit is also helpful. If you can’t pay your credit card in full each month, try to at least pay more than the minimum repayment.

WHAT’S THE DEAL WITH CREDIT REPAIR COMPANIES? If you notice any errors on your credit report, you can fix these for nix. Make sure to contact your credit provider if something’s looking a li’l amiss. It’s not always recommended to engage a credit card repair company – they can be expensive, and you can easily enough fix the errors yourself. Plus, at the end of the day, they’re not going to improve your credit score. “You cannot change the past,” Rosemary says, “but you can work on improving your score in the future.” If you do go down the credit repair company route, it’s important to check the credit repair company is licensed on ASIC’s website first.

WHEN TO ASK FOR HELP There’s absolutely no shame in asking for help. Many small-biz owners struggle with debts and bad credit – financial counsellors have seen it all. They’re free and confidential, and are experts in helping folk get a handle on their finances. Rosemary suggests that if you’re struggling with your debts, “a financial counsellor can assist you with dealing with creditors to set up a hardship arrangement to hopefully make the repayments more affordable”. Hardship arrangements will be included on your credit report for 12 months, but they don’t impact credit scores as long as the payments are made on time. The best way to go about accessing a financial counsellor is contacting the National Debt Helpline. They’re a rad support that are here to help you manage your small biz, and help you turn your bad credit into something great.

*Quick financial disclaimer. The information above doesn’t constitute financial advice, and it doesn’t account for your specific circumstances or financial goals. Make sure you get some independent guidance from a professional you trust. 

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