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Beware the Credit Kamikaze

Posted 4 years ago in Small business by Beeny Atherton
Posted by Beeny Atherton

When it comes to making a big decision in life, doing your research and shopping around is usually how you would guarantee the best outcome, right? Well, yes… except for when you’re shopping around for credit.

Now that Moula can lend up to $250,000, you might be thinking of taking out a loan to grow your business. This could be for a big stock order, to purchase equipment or hire a new staff member. There are dozens of loan providers out there, and it definitely makes sense to be armed with as much market research as possible, to compare rates, and find the right product to suit your business. And as with any other big financial decision, you’ll want to understand the terms of the contract, be confident and comfortable that you understand the repayment terms and your ability to make the payments, and of course read any fine print.

Comparing credit providers

When it comes to comparing credit providers, it’s not always so simple. In Australia, credit enquiries – where you have approached a lender and asked them to consider you for credit – will almost always result in a “credit enquiry” on your business and/or personal credit history with one of the main credit bureaus (the most well-known being Veda and Dun & Bradstreet).  Okay, so what’s the problem?

Well, credit bureaus aim to define your creditworthiness in terms of a single number, on a scale where a low number means you are not very likely to pay your bills, and a high number means you probably will.  That number is influenced by things such as:

  • your history in dealing with other lenders and service providers (have you ever defaulted on a loan; Are you paying on time?)
  • demographic information (such as age and location)
  • whether you have been shopping around for credit (credit enquiries).  

Typically, the more shopping around, the lower your score, and the less likely you are to obtain finance. For many small business owners who don’t know how the game works, you end up shopping around some more, and lowering your score even more. Soon enough your business is locked out of the funding market altogether.

How to make the best decisions for your business

So, what should you do if you want to shop smart? First of all, look for transparent lenders who publish their interest rates online. Second, when applying for credit, ask the lender if a credit bureau enquiry will be conducted. If there’s a low chance of getting finance, consider pulling your application before a credit check is run.

Shopper beware: So many good businesses conduct Credit Kamikaze on their credit bureau score, as they’re not aware of the link between credit enquiries and credit score reduction. Don’t be one of them!

As a Xero customer, Moula will extend a saving of between 2.5% and 5.0% off their standard APR. Visit Moula to learn more about how it works with Xero to help you grow your business – with no hidden fees and no hassle.

andrew new headshot bw

Guest author: Andrew Watt, Co-founder and COO of Moula

Before becoming co-founder and COO of Moula, Andrew spent over 16 years with a number of financial institutions in London, spanning risk management, credit modeling and structuring. Now that he’s back home, Andrew is focused on solving the capital problem faced by small businesses in Australia. He has a Bachelor of Commerce from the University of Melbourne and is a Chartered Accountant of Australia.

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