How lenders use credit records
The majority of lenders want to see both your business and personal credit records. They use these records to assess the risk of lending you money. The credit records tell them what accounts you have, your payment history and any court orders issued against you or the business. If you have a good history of paying your debts, you will be seen as a low-risk customer. If you have a poor credit rating, many lenders will reject your finance application.
Your credit rating isn't great, so what can you do?
A bad credit rating is an obstacle, but it doesn't have to be the end of the road for you as an entrepreneur. There are alternative ways of finding finance. A bad record just makes it considerably more difficult. Let’s have a look at some of the options you can try:
- Restore your credit rating and prepare documents to explain how and why you have a poor credit rating.
- Explore alternative lenders.
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Restore your credit rating
The good news is that it's possible to restore a business’ credit record, although it does take time.
Here are some action steps that can help you deal with your bad credit record:
Check your credit record
Contact either Experian or TransUnion to obtain a copy of your credit record. If you find the document hard to read, you can download a file from both companies that explains the data that each section of the credit record contains. Use one of the links below to access your free credit record:
Clear your name
The amendments to the National Credit Act require credit bureaux to immediately remove all negative data if you have repaid the debt in full. Don't wait for them to discover that you have repaid the debt. Rather, contact all of the credit bureaux (remember that they keep separate databases so you need to contact all of them), to inform them that the debt has been repaid (be prepared to provide proof of payment) and request that they remove the negative reference on your credit record. You will need to follow up to check and obtain confirmation that they have removed the data, and if need be, contact the Credit Bureau Ombudsman to assist you. The Ombudsman can be contacted on 0861 662 837. If you haven’t paid off the debts, then work out a repayment plan so that you can clear your record. In short, there is no way to immediately clear your name if the debt is still owed.
Sit it out
Fortunately, the maximum period negative data sits on your credit record is only two years (for slow and late payment information). During this time, you can improve your cash flow management so that you are able to settle your debts and ensure your record stays clear in the future. You are simply going to have to wait for slow payment information to disappear off your credit record. If you have a judgement against you for non-payment of debts and you can’t settle these debts, then this negative data will remain on your credit record for five years and you’ll just have to sit it out.
If you want a lender to lend you money and you have a bad credit record, you are going to have to explain what happened, why it wasn't totally your fault, what you've done to make good on the debt and what plans are in place to ensure it will never happen again. You need to show them that you know exactly what is going on in your business, especially when it comes to finances. If you aren't sure how to approach this, chat with a business advisor, as they are likely to have experience in writing these types of documents.
The National Credit Act gives the public access to the office of the Credit Information Ombudsman who will mediate in a dispute between a business owner and the credit bureaux. The Ombudsman’s office can order the bureaux to change the record if it is felt that the business owner is right.
The office of the Ombudsman reports that complaints from businesses are far too rare and urges a more proactive approach by business owners. To date, most complaints have been from business owners who had been blacklisted in their personal capacity for business debts, even though they haven’t signed personal surety for the unpaid debts of their companies or Closed Corporations. These complaints are routinely upheld by the Ombudsman and rectified by the bureaux.
The Credit Information Ombudsman can be contacted on 0861 662 837.
In South Africa, a bad credit record will almost certainly disqualify you from formal, institutional lenders, such as banks. However, the Small Enterprise Finance Agency (SEFA) has a mandate to assist small businesses with access to finance, and they might be willing to work with you even if you have a bad credit record. Before you approach them, you must have prepared a document that clearly explains how the bad credit record came about, what steps you have taken to rectify it, and what you have done to ensure that your credit record remains clean in the future. It is a good idea to read the modules in the section titled What are Lenders looking for
, as this provides you with valuable information about what lenders offer, as well as what they are looking for in order to approve a finance application.
Smaller lenders are often more willing to work with you to understand how your bad credit rating occurred. If you can convince them that you have learnt from the experience that caused the poor rating and that this will not happen in the future, they might well consider your finance application in a favourable light.
The amount of finance you require and how this money needs to be spent will determine whether government grants can assist you. In general, grants are available for smaller expenditures and some of them require you to match the grant i.e. if the equipment you want to buy costs R500 000 then you can apply for a grant of R250 000 and you will have to fund the remaining R250 000.
Family and friends know you best, and if you have a good relationship with them, there is a good chance that they can assist you with smaller amounts needed for your business.
Depending on the stage and state of your business, you might want to consider selling shares in your company. This is called equity investment. Early stage companies could consider angel investors, whilst more mature companies can follow the venture capitalist route.
Either way, you would need to prepare explanations for the reasons why your credit rating is poor. Fortunately, angel investors and venture capitalists are business people and they understand that issues can arise that cause negative credit ratings. However, they will want to hear your explanations so that they can decide for themselves whether you and your company are worth investing in.