Bad Credit Due To A Business Going Bad

personOtto Dargan access_timeMarch 15, 2019

Can I still get a home loan?

It’s no secret that, on average, more than 50% of businesses fail within the first two years.

For the other two million plus business owners in Australia, it’s common to fall behind on bills, payments on credit cards and business lines of credit, or other business-related expenses.

If you’ve experienced financial stress in your business that put some unwanted black marks on your credit report, it doesn’t necessarily mean you can’t get approved for a home loan.

How to present a strong case

Most banks and lenders won’t consider your application until the bad credit marks on your credit file have cleared.

Luckily, a select few might consider minor credit issues like small defaults or multiple credit enquiries if you can provide bank account statements and home loan statements proving that your bad credit issues are behind you.

For more serious credit problems, there are non-conforming or specialist lenders that are more likely to consider your situation if your current lender has declined your mortgage refinance application.

There are several ways to present a strong case.

Evidence of regular payments

You first need to prove that you have been making your payments on time since the blemish was listed on your credit file.

This includes payments across all debt facilities such as your mortgage and business loans, as well as your mobile phone and utility bills.

Golden tips:

  • Set up automatic payments with your credit providers to ensure you don’t miss your payments and to avoid defaults being marked on your file.
  • Speak with your credit provider and ask whether you can make reduced repayments for a short-term (repayment holiday) so you can get back on your feet.
  • Close down unused accounts in order to better manage your outgoings and avoid lenders assessing you on your credit limit rather than your actual monthly spending.
  • Prove the credit issues are behind you

    Secondly, you need to show how you incurred the bad credit.

    Was it because of multiple enquiries, unpaid bills or a missed ATO bill?

    Whatever the reason was, you need to be able to prove that it was a one-off occurrence.

    Evidence that you’re in a better position

    Secondly, you need to show how you incurred the bad credit.

    Was it because of multiple enquiries, unpaid bills or taxes?

    Whatever the reason was, you need to be able to prove that it was a one-off occurrence.

    Avoid getting more black marks on your credit file and prove your character as a good borrower.

    Show the banks that you’re making a good effort to fix your problems and working towards a stable financial position. You can do this by:

    • Paying off any defaults or late repayments.
    • Paying down any high-interest debts.
    • Reducing your personal and business spending.
    • Building your savings buffer.

    Can you provide evidence of a profitable business?

    Typically, the more documents you can provide, the better, although your mortgage broker may apply some discretion in an effort to build as strong a case as possible.

    Income documents can include:

    • Business Activity Statements (BAS).
    • Your latest Australian Taxation Office (ATO) tax portal printout.
    • Bank account statements for the last three to six months showing turnover.

    If you can’t provide up-to-date financials, there are low doc options available for bad credit home loans. It’s just a matter of finding the right lender.

    Why is your credit file so important?

    Australian lenders rely heavily on a borrower’s credit report because it says a lot about your reliability and character as a borrower.

    Getting a black mark is quite serious!

    For example, you only get a default listed on your credit file when you are more than 60 days late with a payment.

    Even under the new positive credit reporting environment, you have two weeks to catch up on a late payment before it is recorded in the repayment history information (RHI) section of your Equifax report.

    Bank statements show evidence of your incomings and overall living expenses but having a clear credit file goes a long way in building a strong mortgage application.

    How can a mortgage broker help?

    A specialist mortgage broker can help you build a strong case to show that you are now financially stable and capable of making all your repayments on time.

    What they also bring is the credit knowledge to identify which lenders are more likely to approve your home loan.

    We have almost 40 lenders on our panel and have close relationships with a number of specialist lenders in Australia, including:

    How can business finance help?

    Regardless of how much time you spend planning on managing your cash flow, there comes a time when things just get tight.

    This is where business financing can come in handy. Some of these solutions include:

    • Invoice discounting: This facility turns unpaid business invoices into cash.
    • Business line of credit: The bank will approve your LOC limit and an interest rate will apply each time you drawdown from the facility
    • Overdraft facility: You can usually get an overdraft facility if you have an acceptable residential property as security.
    • Business offset account: Maybe you have this already but, with help from a business mortgage broker, you may be able to better utilise this feature to reduce your interest payments.
    • Factoring or invoice factoring: This allows you to extend credit against money that you are owed.

    Why do many businesses struggle with cash flow?

    Overspending

    Most new companies tend to easily lose track of their expenditure.

    Failing to keep a detailed report of small, incremental expenses can lead to losing large sums of money at an alarmingly fast rate.

    Over-prioritising sales

    Most new businesses tend to focus more on sales and finding new customers and less on implementing smaller tasks like invoice payments and debt recovery.

    These factors slowly pool up and contribute to the company losing a lot of money.

    Businesses that do not allocate adequate resources into sales management and invoice and account administration risk the chance of quickly running out of money.

    How can you protect your business from losing money?

    According to a 2017 inquiry into payment times and practices, Australian supplier invoices are paid 26.4 days late!

    This makes them some of the worst payment times in the world.

    Untimely, payments from customers mean that the business itself will have to bear the gap with their own savings.

    Unpaid invoices and mounting debt can adversely affect the cash flow of small to medium size businesses(SMEs), but there are steps you can take.

    Provide clear payment details

    Word of mouth is simply not enough.

    Ensure that all the contracts and invoices have clear payment details mentioned from the get-go.

    This includes correct bank account details and a clear deadline for payment, such as 14-30 days.

    Doing so will remove any confusion or ambiguity that might arise.

    Send timely reminders

    In most cases, a simple reminder is all that a client needs to pay their invoices.

    A phone call or an automated email reminder can go a long way to encourage the clients to do their part.

    Bad credit due to a business slowdown?

    Call us on 1300 889 743 or fill in our free online assessment form and we can help find the right home loan solution for you.