SMEs and comprehensive credit reporting

The benefits of credit reporting reform explained

Comprehensive credit reporting, or positive credit reporting, is exactly as it sounds- an inclusive reporting system that allows credit providers to access all aspects of a consumer's credit behaviour, from positive payment behaviours and bills that were paid on time to whether a credit application was approved or not.

However, Australia is one of the few countries around the world that does not have such a system, along with New Zealand. We still operate under a negative credit reporting system, which portrays only credit information regarding negative events such as defaults and bankruptcies.

All this is set to change, with the Australian Government's current proposal to move to a positive credit reporting system that will provide a clearer view of a person's credit profile. This shift required changes to current laws under the Privacy Act, which until recently only allowed financial institutions to access whether a consumer had applied for credit, although not whether that application was approved, and any late payments on previous lines of credit.

In May this year, Dun & Bradstreet submitted a proposal in support of these reforms to the Senate Finance and Public Administration Committee, asking for an amendment to the current Credit Reporting Privacy Code. Changes to the current credit reporting code were initiated by Dun & Bradstreet a number of years ago and based on this and submissions from other bodies, the Senate Committee began an inquiry into this issue.

The New Zealand Privacy Commissioner, Marie Shroff, has also proposed similar changes to the Privacy Code that would bring the credit reporting system closer towards that used in the United States.

But what does this all mean for small and medium-sized businesses? There are two main benefits: the reforms will make it easier for SMEs to run credit checks on customers and other small businesses, as well as increase their ease of access in obtaining loans.

Simplified credit checks

If approved, the amendment to the Credit Reporting Privacy Code will provide a more comprehensive picture of a consumer's financial health, such as risk ratings, payment histories, credit limits and regular payment patterns. For example, if small businesses know that a company has defaulted on a payment or has been subject to a credit inquiry, they can make more informed decisions about doing business with that company.

Currently, SMEs can use D&B Express on a casual, non-subscription basis to access credit reports online of companies of all sizes as well as of their directors.

If the reforms are implemented, credit reporting agencies and providers will also be able to use the credit information in their research, except for individuals' identities. Furthermore, the definition of credit providers will be expanded to include more small businesses, meaning that they are eligible to receive information from credit reporting agencies for use in direct marketing campaigns or research, if conditions permit.

Easier loan applications

A significant proportion of small businesses in Australia are sole traders, this number being 32 percent in Western Australia. As these businesses are basically owned and operated by a single person, the credit health of the sole trader is largely dependent on the credit health of its owner. This makes it more difficult to obtain loans from financial institutions if they possess a less than perfect credit history, particularly under a negative reporting system.

If the system were to transition to one that was more comprehensive, sole traders' positive payment histories and credit applications that were approved would also be recorded, making them more favourable candidates to lenders. A positive credit reporting system enables improved credit scoring, which is frequently used by bigger lenders to assess small business risk. This not only increases small business access to credit and loans, but also provides an inroad for larger lenders to enter the small business lending market.

Increased access to credit information would also mean increased competition in the credit provision industry, making it more ideal for small businesses to shop around for the lowest price.

The Senate Finance and Public Administration Committee will release the results of its inquiry into the credit reporting reforms by the end of September this year, with the New Zealand Privacy Commissioner holding hearings on the same issue this month in Auckland and Wellington. A review on the determinations of a credit provider is also being undertaken by the Office of the Australian Information Commissioner this month.

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