Australia’s small and medium business owners must improve their financial literacy by better understanding their credit files.

Banjo currently approves around 55% to 60% of all loan applications it receives, with an average loan size of $200,000. When we decline requests, it is often because applicants have failed to demonstrate their ability to service the loan.

While lenders are primarily looking at a company’s ability to repay loans on time, they are also assessing a business’ intention to repay credit based on past performance. This is where an SME’s understanding of its business credit file is critical.

We use business credit files as a reputational piece. A healthy credit report gives you more opportunity to get cheaper credit, be offered more flexible terms of repayment, or to extend existing facilities when opportunities come up and you need to go into debt to make the most of them.

Given the importance lenders place on credit files for approving loans and credit, it’s crucial that SMEs make sure the information in their files is correct.

Unfortunately, having incorrect information in credit files is one of the most common mistakes individuals or organisations make. You want to ensure that your personal repayment history or any sort of information that is on the public record is accurate.

Australian credit reporting agencies such as Illion, Equifax, Creditorwatch and Experian aggregate the information that goes into a credit file and create a credit score. Because the agencies don’t necessarily have the same information, they may each have a different score.

Telecommunication companies might, for example, send default information to one credit bureau and not to others. You can’t just look at one and necessarily think it’s the same information on the other reports.

Another reason for businesses to access their files is to monitor the number of credit inquiries that have been made under their company’s name.

In some cases, the more inquiries you make, the more ‘credit hungry’ you may be in the eyes of lenders. This may have the potential to push your overall credit score downwards because it may look like your business is in financial distress.

There are some simple steps business can take to maintain a healthy credit file, including:

  • Paying your bills, credit facility or loan prepayments on time. The agencies may use information to actually inform the credit score.
  • Managing credit limits. Manage your credit limits effectively and avoid over-leveraging your business.

Regularly check information on your business credit file to ensure accuracy which will assist with you maintaining a good score. Creditsmart.org.au is a useful website for managing your personal credit score.

Andrew Ward is chief risk officer at Banjo.