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The Credit Kamikaze

The Credit Kamikaze | Moula Good Business

When it comes to making a big decision in life, doing your research and shopping around is usually the way to go to get the best possible outcome, right?

The answer is yes… Except for when you’re shopping around for credit!

Surely it makes sense to compare loan providers and understand the terms of the contract. You want to be comfortable that you understand the repayment terms and confident in your ability to make the payments, and of course, read any fine print. Well actually, it’s not so simple – let’s dive in!

When Will I Have a Credit Enquiry?

In Australia, loan applications – at the point where you have approached a lender and asked them to consider you for finance – 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).  Ok, 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 (Did you ever default on a loan; Are you paying on time?)
  • Demographic information (age, location), and
  • Whether you have been shopping around for credit (credit enquiries).  

Typically the credit enquiries you have on your credit report, the lower your score will be, 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….and soon enough your business is locked out of the funding market altogether.

So What Does This Mean for Your Loan Application?

Shopper beware: When applying for finance, 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.

Most (if not all) business lenders will run a credit check at some point in the application process, so know if and when they do and make sure they ask for your consent. Also, make sure you are certain you want to apply before you agree to a credit check and don’t consent to a credit enquiry if you are still shopping around for loans.

At Moula for example, we don’t submit a credit enquiry until we are in the final stages of the loan application, so your credit rating won’t take an unnecessary hit. We will also always ask you before we do any kind of credit check.

We have seen so many good businesses conduct Credit Kamikaze on their credit score, as they’re not aware of the link between credit enquiries and credit score reduction. Don’t be one of them!

Author:

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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