Business credit cards, credit scores and managing debt

How business credit works

Credit is money you can use now and repay later. Common types a small business might come across:

Each has its own costs: interest, annual or monthly fees, late fees and sometimes fees for paying early. The way to compare them is the total cost over the time you’ll use it, not just the advertised rate. This guide doesn’t compare or recommend specific products; an accountant or a licensed credit adviser can help with your situation. For start-up funding, see Funding a start-up.

Using a business credit card

Many owners find a dedicated business card useful because it keeps business spending separate, makes bookkeeping easier and can give staff controlled spending limits. Things to understand before applying:

• Interest-free periods usually only apply if you pay the full closing balance by the due date. Cash advances usually attract interest straight away.
• Annual fees, foreign transaction fees and fees for extra cardholders can add up.
• Rewards programs are only worth something if the rewards are worth more than the extra fees.
• Who’s liable. Some business cards are in the business’s name but still need a personal guarantee from you (see below).
• Card controls. Set limits on staff cards and check statements every month.

A business card works best for expenses you’d pay anyway and can repay in full. Using it to cover ongoing shortfalls in cash flow is a warning sign, not a solution. See Financial planning and cash flow.

Personal guarantees

Many lenders, landlords and suppliers ask a small business owner or company director to sign a personal guarantee. It means that if the business can’t pay, you personally can be required to pay, which may put personal assets, including your home, at risk. This applies even if your business is a company.

Before signing any guarantee:

• read it in full, and ask what it covers (one debt, or all debts the business ever has with that lender)
• ask whether it can be limited to a set amount or a set time
• get independent legal or financial advice
• keep a copy, and a list of every guarantee you’ve signed.

See Sole trader, partnership, company or trust? for how your business structure affects personal liability.

Credit scores and credit reports

Lenders use credit reports and scores to decide whether to lend to you, how much and on what terms.

• Your personal credit report shows the credit you hold, your repayment history, applications you’ve made, any defaults and some court and bankruptcy information. Small business lenders often check the owner’s personal report, especially for new businesses and sole traders.
• Your credit score is a number calculated from your report. Moneysmart explains that, depending on the credit reporting body, it’s a score between zero and either 1,000 or 1,200, and a higher score means lenders see you as less risky.
• Get your report for free. You have the right to a free copy of your credit report every 3 months. Australia has two main credit reporting bodies, Experian and Equifax, and they can hold different information, so check both. Moneysmart recommends checking at least once a year.
• Fix mistakes for free. If something is wrong, ask the credit reporting body or the credit provider to correct it. You don’t need to pay a credit repair company to fix genuine errors.
• Your business’s credit history may also be checked: whether it pays suppliers on time, any defaults and court actions.

What tends to affect a score (from Moneysmart): how much you’ve borrowed, how many credit applications you’ve made, and whether you pay on time. Making lots of applications in a short time, missing payments and having defaults listed can all count against you.

Keeping debt under control

Some habits that help many small businesses:

1. Know what you owe. Keep a simple list of every debt: lender, balance, interest rate, repayment, due date and any guarantee.
2. Separate business and personal debt. Mixing them makes it hard to see how either is going.
3. Match the debt to the purpose. Short-term credit for short-term needs; longer-term finance for things that last.
4. Watch your cash flow weekly. Most debt problems start as cash flow problems. See Financial planning and cash flow.
5. Get paid faster. Clear invoices, payment terms and follow-up reduce the need to borrow. See Getting paid.
6. Review costs once a year. Look at rates, fees and whether each facility is still needed.

Warning signs

Get help early if you notice:

• using one form of credit to pay another
• paying suppliers, rent or tax late, or only paying the minimum on cards
• regularly hitting your overdraft or card limit
• debt collectors or creditors calling, and avoiding their calls
• receiving letters of demand or court documents
• stress about money affecting your sleep, health or relationships.

If you’re struggling with debt

1. Don’t ignore it. Problems are much easier to solve early.
2. Talk to the people you owe. The Australian Small Business and Family Enterprise Ombudsman (ASBFEO) suggests paying any part you know you owe and can afford, and offering a payment plan for the rest, within your means. Many lenders have hardship processes.
3. For tax debts, contact the ATO early about your options. See the ATO website for current information.
4. Get free, independent help. The Small Business Debt Helpline (1800 413 828, weekdays) is run by financial counsellors who give free, independent and confidential advice on business debts, loans, bills, leases, and bankruptcy and insolvency questions. For personal debts, the National Debt Helpline is on 1800 007 007.
5. Be wary of “debt fixers”. Some debt management and credit repair businesses charge high fees for things you can do yourself for free. Talk to a free financial counsellor first.
6. Look after yourself. Financial stress is hard. business.gov.au lists mental health support for business owners, including services designed for small business owners.

If you have a dispute with a lender

• Start with the lender’s own complaints process, and keep records of every conversation.
• The Australian Financial Complaints Authority (AFCA) is a free, independent service for complaints about financial firms that are AFCA members, including from small businesses (AFCA defines these as having fewer than 100 employees).
• ASBFEO can help you understand your options in disputes with other businesses.