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Small Business Owners: Why is Credit Reputation Important to You?

The joys and pains of small business ownership

Running your own business offers rich opportunities for personal growth, creative fulfilment, and, for some, the realisation of lifelong dreams. Indeed, for those who dare to tread the path of entrepreneurship, the rewards extend far beyond monetary gains, encompassing autonomy, innovation, and a spirit of resilience.

However, data from the Accounting and Corporate Regulatory Authority (ACRA) shows that over 11,000 sole proprietors and partnerships ceased operations in 2023. If you are able to weather the trials and tribulations of setting up and running a successful business, you may find that the joys of being a small business owner extend to beyond the pursuit of financial success.

Being a business owner

Given the increasing expenses on office rentals and rising costs in Singapore, becoming an entrepreneur or establishing a business can be a challenging task. Besides possessing a brilliant business concept, the most basic and foundational aspect of launching a business is undeniably – capital funds. Whether it is a small startup or medium sized business, business owners often have to bear the initial costs for a period of time before they start having a steady source of revenue or until they are able to breakeven in costs. Occasionally, business owners will also realise that their misjudgement has made them overlook and accrue some unforeseen expenses along the way. We all know for a matter of fact that there will definitely be rainy days when the business is just not picking up for various reasons and there might also be a marginal chance of failing. Often, it is inevitable that it might take up to months or even years just to cover up the expenses and stay profitable in the long term. It also takes a lot of time, persuasion and social networking to find a potential investor who might be willing to take a leap of faith. However, if the investor decides to withdraw his support, how can you ensure sustainability of your business in such unforeseen circumstances?

Importance of credit reputation for business loan application

Before a loan is granted, banks or financial institutes will conduct a background check on the financial history of the business owner or also known as, the original borrower. Credit Bureau (Singapore) Pte Ltd is Singapore’s most comprehensive credit bureau that provides credit reports of individuals. Through this individual credit report, lenders will be able to pre-assess the borrower’s credit health and verify his overall financial standing before approving a loan.

Every individual who has applied for a credit facility in Singapore will have a credit score. The credit report is a summary of an individual’s personal credit facilities and total credit limit across all retail banks and major financial institutions.  It is a record of an individual’s credit history, and this includes detailed personal information, information about credit accounts and public records.

Borrower with a good credit score can help lenders to make better lending decisions quickly and objectively. Borrowers with poor credit score are likely to have lower chances of getting approved for a new loan as this will indicate a higher probability of defaulting future payments. Some lenders might even conduct a credit check on the loan guarantor too. Essentially a loan guarantor will hold the same liability as the original borrower therefore doing a credit check on the loan guarantor can help lenders to further mitigate risk of potential default payments especially in cases whereby the original borrower is incapable to pay up.

Lenders will usually base off credit reports as one of the decisive tool to grant a loan application therefore it is critical for borrowers to understand their current financial standing and the early measures they can take in order to maintain a good credit score.

What do lenders look out for on your credit report?

Non-Scored or Public records.

Lenders will look out for non-scored risk grade and especially if the individual has any record of bankruptcy proceedings, it will perceive as a high-risk borrower.

Bureau Score.

The Bureau Score is calculated from an algorithm based on information in your current available credit data and is a fluid number which may change from time to time in tandem with changes in your credit information. Lenders will assess the Risk Grade and Probability of Default to determine if you are a high-risk borrower.

Account Status History.

Lenders will be able to use this information to assess your repayment behaviour for the past 12 months

In reference to sample credit report and explanation:

Practice good repayment habits now

Be vigilant in manging all your credit facilities and understand the ripple effect that might come if your loan application is rejected by the lenders. Ultimately different lenders may not necessarily look out for the same indicators in the credit report when assessing the borrowers therefore the best preventive measure is to always exercise good money management and make repayments on time.

Follow and like CBS Facebook and Linkedin page for more useful content and tips to maintain a good credit score or visit the CBS’ website to get a copy of your credit report.

If you are facing increasing difficulties servicing payments to your credit cards or other unsecured credit facilities, consider attending our weekly Debt Management talks (conducted both over Zoom and in-person at our office), where you will learn more about what to do, when and how to communicate with creditors, what are the common collection actions creditors can take, what are the various debt settlement options are and what is the CCS Debt Management Programme. Click here for schedule.

After attending the talk, you can submit a request for one-to-one credit counselling. Details on the counselling session and instructions on how to arrange for an appointment will be explained during the talk.

Published 18 February 2024.