Liability Risk Management - Finance Brokers - Specialising in Mortgage, Leasing and Business Finance

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Protect Your Credit Rating

One of the problems I come across, all too often, when asked to help clients with new borrowings, or to restructure existing loans, is adverse entries on their CRAA (Credit Reference Association Of Australia) Report.

From a lender's viewpoint (not CRAA) there are two principal types of entries, disputed transactions with either a supplier or a financier.

A lender will assume that if you are in business you are likely to have the odd dispute with suppliers. Even if the dispute goes to court and judgement is awarded against you the lender will seek an explanation. Provided the default has been settled, they are generally accepting of the situation.

However, if your default or judgement is to another lender they go deaf.

In most cases default with a lender is caused by non-payment. It is very hard to argue to the new lender that they should proceed with a loan if the prior history has shown cash flow difficulties. Should the default be caused by a dispute with your lender (after all, they are just suppliers of finance and you could have a disagreement with a lender as you would with any supplier) they still go deaf. Their conclusion - you must be a difficult client.

If I am able to help these clients it is normally with private lenders at higher interest rates. This is the implicit cost of not protecting your credit rating. Once a new credit history has been established more lenders will gradually take the plunge and the cost of borrowing will come down.

It is important to note that an adverse listing on your credit report stays there for five years, when it automatically drops off. The five years starts from the date of listing, not the date of default or date of payment. If the default is relates to a commercial transaction the lender can note the default at any time after the default has occurred. If the default relates to a consumer transaction the lender can note the default on your file until 60 days after your final notice.

Most clients say "but I paid it". Payment does not change recorded history or the circumstances leading to the default. However, if it's a supplier dispute, it does help if you have accepted the umpire's decision and had the capacity to meet your obligations

Clients have expressed concern that they cannot negotiate with their lenders as they can with their creditors. I think the main problem is that clients know how business operates, but don't understand how lenders operate and how to approach them.

This has been further exacerbated in recent years with lenders moving their decision-makers to regional offices, out of the reach of clients, who don't know who to approach.

When you buy goods from a creditor he normally understands your business, the industry in which you both operate and any current trading problems.

When clients extend their overdraft, for example, they rarely tell the bank. If the bank meets the cheques they are doing so because they know the client and either expect deposits to be made, or a call from the client to advise what's going on. When neither is forthcoming, they seek answers and the client normally runs for cover. If the lender is not informed, history tells them to assume the worst.

Everyone needs lenders. As soon as you perceive a problem, develop a plan and talk to your lender.

There is no substitute for communication AT THE START. If you cannot stick to the plan, talk again.

Do not allow a lack of communication to destroy your credit rating. It is a very costly exercise.

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The above article was recreated from Peter Ryan's booklet :
"A Small Person's Guide To Big Lenders".

For information on how to obtain additional articles or the entire booklet,
please email Peter Ryan