As a crackdown, it hasn’t amounted to much. Just a year after introducing a licensing regime to stamp out disreputable credit providers, the Australian Securities and Investments Commission refused licences for just four out of 6,081 businesses.
ASIC insists that it is serious about protecting consumers and start-up businesses from rogue credit providers, claiming that a less forgiving stance will be adopted as the licensing scheme “matures”.
Given that around 400 applications were turned down by ASIC for being “incomplete or inadequate”, it’s clear that credit providers face increased scrutiny.
With start-ups continuing to struggle to secure finance from reliable sources such as banks, and with 2,500 complaints made to ASIC over the past year on credit matters, the need to ensure you are getting a genuinely good deal for your funding is now more pressing than ever.
But how can you ensure that your credit provider isn’t dodgy? There are a few commonsense steps start-ups can take to ensure they aren’t ripped off.
Colin Porter, founder of CreditorWatch, says: “Banks have really tightened up their financing in order to minimise risk. When that happens, start-ups have to go to alternative sources of funding, which opens the door to unscrupulous providers of credit.”
“There are a few companies that broker a fee from a bank and then after a period of time close down, leaving the bank to chase the customer. I wouldn’t say it’s rife, but it does happen.”
“The basic rule is that if it’s too good to be true, then it usually is.”
Marc Peskett, partner at business advisory service MPR, says that credit problems usually present themselves in the consumer market but, as start-ups often have to draw upon personal financing such as mortgaging for their businesses, new ventures are also at risk.
“ASIC has raised the bar in terms of qualifications and, overall, I think the industry is well regulated,” he says. “The first thing to do is to see whether the credit provider is licenced. There are about 12,000 that are.”
Damian Karmelich, director of marketing at D&B, says that it’s important that start-ups receive advice from outside the credit industry.
“You need to chat to your accountant, who will help you understand the cost of capital and give you an independent view of what you need,” he says.
“From there, there are lots of options – the major banks, the second tier banks – which are very competitive in the SME space – and brokers.”
Peskett adds: “Stick to your bank if possible. But if you have property to borrow against, you will struggle, so look for the three ‘ifs’ – family, friends and fools.”
“Better still, bootstrap your business. Start off small, lean and mean. Once you’ve validated your business model you can look for funding, but not before then.”
If you feel your business is ready for a cash injection, it’s important to keep an eye out for telltale signs that a credit deal isn’t for you.
Perhaps the most obvious indicator of a good or bad credit arrangement is the interest rate that you’ll pay on the loan.
“You have to understand the cost of your credit,” stresses Karmelich. “There’s a big difference in deals that offer you a deal at 10% and those at 30%. The fact that they see you as a risky market and that they have to cover their operations with a high rate is a sign of risk in itself.”
“Business loans are generally between 11 and 15%. Once the rate hits 20%, you need to ask whether it is overpriced.”
“Also, realise the annualised cost of credit. A 15% loan for three years is a lot different to a 13% one for 10 years.”
Peskett adds: “There are some rates out there that are horrific – around 30-40% when annualised. You have to be very careful.”
“If you are after that kind of money, it’s better to get a credit card and have a six month honeymoon on interest. That is better than the second or third tier credit providers.”
If you aren’t sure or are unfamiliar with a credit provider, do your own checks. A quick Google search will show if they’ve had any scrapes with the law or negative feedback.
“You need to check their track record, so talk to other small businesses that have used the credit provider,” says Karmelich. “Look for reputations and longevity – if they’ve been around for awhile and customers speak positively of them, that should be a reassurance.”
“Also, in the same way that they will credit check you, make sure you credit check them. It’s amazing how many credit providers fall over and you can see from their financial statements that they never earned a buck.”
“Take your time to do your due diligence on a credit provider, rather than just jump into the first deal you see.”
Almost as important as the credit provider you choose is the amount you borrow and what you intend to use it for. Again, your accountant is a good starting point here but, ideally, you want to start as lean as possible. Don’t be tempted to spend lavishly for the sake of it when starting up.
“If you are setting up your office, for example, do you really need that $4,000 mahogany desk?” asks Karmelich. “Or could you go to the auction house and get one for $500? Make sure that when you invest money, you are investing it in quality goods and services that add value to your business.
“Tie your borrowings for investment to things that provide cashflow. You need to ask yourself how long can you sustain a loss. Investing in things that increase the productive output of your business will help that.”
For more information on ASIC’s credit provider regime, click here.