Starting a business when the credit file is already against you

A new business has no turnover and no trading history, so an unsecured lender has only the credit file to read and the file decides the whole application. Equity in real property is the column that is still full. Before anything else, find out whether the listings on your file are consumer or commercial ones, because the rules that govern them are different and so is what can be done about them.

There is nothing else to read, and that is the whole problem

A lender assessing a business has a short list of things it can actually read, and working capital with bad credit sets that list out: the credit file, the turnover, and the security. A new business empties the middle column by definition. There are no twelve months of bank statements, no lodgements, no customers paying on time to point at.

So for a start-up, the file is not one input among three. It is the entire unsecured decision, with nothing beside it to argue against it. That is why a listing bites harder at the beginning of a business than it ever will again — not because anybody is being harsher at the start, but because at the start there is nothing else in the file to weigh it against. An established business with the same listing and two good trading years has a counter-argument. A company registered last month does not.

Which leaves the third column, and it is the one nobody thinks of as finance. Equity in real property you already own is worth what it is worth regardless of the year you have had, and it is the basis on which a start-up business loan can be assessed at all.

You are not the first one this week

Most people in this position ask their bank first. The bank says no, and it almost never says no because it has decided the loan would not be repaid. It says no because a new business has no financials to assess and because there is a line in the credit policy about listings. Those are reasonable things for a bank to care about. Neither of them says anything at all about whether there is equity in the building.

That gap is where HomeSec has been since 2004. We are not here to judge how the last two years went — it is one of the most ordinary things on the files we see, which is why we also write about business loans for borrowers with bad credit. What we look at is whether there is enough unused equity in real property and whether the purpose is a genuine business one: not financials, not a credit score, not whether everything is up to date. From a clean, complete scenario funds can be available in as little as 24 hours, and interest can be capitalised for up to six months, so there is nothing payable in the months when a new business can least afford it.

Back to the file itself, because what is on it is more answerable than most people assume.

Find out which kind of listing it is before you do anything

Almost nobody does this, and it changes what is possible. The two kinds of credit on a file are not governed by the same rules.

The OAIC draws the line by purpose. Consumer credit is credit a person applies for, or is given, intending to use it mainly for personal, family or household purposes. Commercial credit, in its words, "is any credit you have applied for that's not for personal, household or family purposes" — business loans, and business purchases paid for later. A founder who has been in business before, or who ran the trading accounts personally, commonly has both kinds sitting on the one report.

Here is the part that matters. The OAIC's own position is that credit reporting laws generally apply to the consumer credit information on a credit report and not to the commercial credit information, and that where commercial credit information is concerned it is the Australian Privacy Principles that apply, to any organisation required to follow them. Its credit report page says it in four words: other rules apply.

So the dated sequence a credit provider has to follow before a consumer default can appear — the minimum amount, the days overdue, the two separate written notices in order, the waiting periods, all of which defaults on your credit file sets out in full — is a consumer credit reporting rule set. It is not the test for a listing that came off a business account. What governs that one instead is narrower and more general at the same time:

1. 1
   An obligation to keep it right.Under the Australian Privacy Principles an organisation must take reasonable steps to ensure the personal information it handles is accurate, up to date, complete and relevant to the purpose it is being used for. That is a standard a stale or half-finished entry can fail.
2. 2
   A right to see it.The OAIC's answer to what is on the report is to ask for a copy, and the access principle requires an organisation to give a person access to the personal information it holds about them unless a specific exception applies. You cannot query an entry you have not read.
3. 3
   A route to correct it.The correction principle sets out what an organisation must do about personal information it holds, and the OAIC's commercial credit guidance puts it plainly: reasonable steps to correct information it is satisfied is inaccurate, out of date, incomplete, irrelevant or misleading.

None of that makes a correct listing go away, and this page is not going to pretend otherwise. What it does is tell you which conversation you are actually having — a question about a dated sequence, or a question about accuracy and relevance — before you spend a month arguing the wrong one. Get the report first. It is the cheapest hour in the whole exercise, and what a lender's decline actually means covers what the applications themselves leave behind on it.

A new company is not a clean slate

It is worth saying this plainly, because a fair number of people start a new company half believing that it is. The company is new. The people are not, and the way that is recorded has changed.

Every director of an Australian company needs a director ID, and ASIC's instruction is that if you plan to become a director you must apply for one before you are appointed — it is a step that comes before the company exists, not after. Australian Business Registry Services issues it. In ASIC's words it is "a unique number that you keep forever", and one ID covers every company you ever direct. Its stated purposes are to deter false or fraudulent director identities and to "help to trace directors relationships with companies over time".

Those relationships are becoming easier to follow, on a date already fixed. ASIC says that currently director IDs are not recorded on the companies register, and that from 1 July 2027 companies will need to provide director IDs to it.

Read that as planning information rather than as a warning. It means a new venture is better presented as the next thing you have done than as an unconnected one, and that a history worth explaining is worth explaining rather than left to be found. It also means the honest version of "start again" is a new business with the same people in it, which is a perfectly good thing to be.

The exception worth knowing: borrow in the established business's name

If you already own another business and it is established, you may be able to borrow in that business's name instead of the new one. How much money you actually need to start a business carries the short version of this tip. Here is why it works and what it costs.

It works because it refills the column the new business emptied. The established entity has a trading history, a bank account with a pattern in it, and a record of its own — the three things a lender wanted and could not get from a company registered last month. The money is the same money and the purpose may be identical. It is simply a different application, assessed against something that exists.

What it costs is worth stating without softening, because this is the part people skip. The established business becomes the borrower. The debt is its debt, carried on its balance sheet and ahead of whatever else it was planning to do with its capacity. Directors are commonly asked to guarantee it, and ASIC's own position is that a company director can be liable for certain debts of the company. And if the new venture does not work, the money is still owed by the business that does — which is the real question to sit with before signing anything, and it is a question for your accountant as much as for a lender.

Two practical notes. If you take this road, apply in the established business's name rather than in the new one; an application lodged by the new entity and then re-papered wastes a week and leaves an enquiry behind. And do not do it at all if the established business is already stretched. ASIC's direction on that is one sentence: "If your company is insolvent, do not allow it to incur further debt."

What a secured start-up loan turns on instead

Briefly, because the start-up loan page covers the mechanics and no credit check, honestly covers what is and is not pulled.

The assessment is the equity and the purpose. Our range is $20,000 to $5,000,000, interest can be capitalised for up to six months so there is nothing payable while the business starts trading, and the term is open, so the exit can be a refinance at bank pricing or a sale when it is ready rather than on a date somebody imposed. There are no financial statements to produce and no credit score threshold, because neither answers the question the equity answers.

What does not change is that the loan is secured on real property you own. That is not a technicality and we do not present it as one: it is the reason the answer can be yes when the file says no, and it is why the plan underneath the loan has to be good enough to carry it.

When borrowing is not the answer

Said plainly, because a start-up is the easiest loan in the world to talk yourself into.

Where there is no equity in real property, a secured loan is not our answer and we will say so on the first call rather than the third. The useful calls then are to your accountant, and — if an existing business is the thing in difficulty — to a registered liquidator about small business restructuring, or to the Small Business Debt Helpline on 1800 413 828, which is free, independent and confidential. ASIC's own recommendation, where a company may not be able to pay its debts, is to consult a registered liquidator or an appropriately qualified specialist insolvency accountant or lawyer.

Three narrower cases where the answer is also no. Where the gap is the plan rather than the capital — the numbers do not work at the volume the business can realistically reach — more money funds the same arithmetic for longer, and the sum worth doing first is the one on how much a new business actually needs. Where the amount needed is below $20,000 we do not lend to it at all, because registering a security over a property for a figure that size is the wrong tool for the job. And where the plan is to put an established, working business behind a venture that cannot service or exit the loan, the honest advice is not to: ASIC's obligation on a director to prevent insolvent trading is the floor, not the ambition, and there can be serious consequences where a company incurs debt while it is insolvent.

This page explains what a lender can and cannot read when a business is new, which body of rules governs a commercial listing as against a consumer one, and what borrowing in an established business's name involves. It is general information, not legal, credit, tax or insolvency advice: what is right in your circumstances is a question for your accountant, a commercial solicitor or a registered liquidator. The OAIC publishes the credit reporting and privacy guidance behind the listing section above, and ASIC publishes what is required of a company and its directors.

Reviewed by Paul Stone, Joint Chief Executive