Re-Establishing Creditworthiness After A Rough Patch
By dflbusiness_@dmin
Loss In Creditworthiness Can Be Heartbreaking For Any Entrepreneur
A worldwide dip in oil prices is leading to a contagion effect among a range of industries in Trinidad and Tobago, and forcing the government to raise taxes to meet budgetary needs. As a result, it’s likely that more of the country’s small businesses will be experiencing problems with their credit—including outright bankruptcy.
Whether it’s the consequence of a business downturn, an unforeseeable event or natural disaster, or simply poor planning, bankruptcy or a loss in creditworthiness can be heartbreaking for any entrepreneur. Unfortunately, there’s no silver bullet for turning bad credit back into good. There are, however, steps you can take to improve your chances of once again being in a position to obtain bank loans and investments.
AN IMPROVED CLIMATE FOR BANKRUPTCY
Seasoned business owners know that the climate for troubled enterprises in T&T is much better than it used to be. That’s thanks to the Bankruptcy and Insolvency Act of 2006, which was passed in 2007 but didn’t come into effect until 2014. The BIA, as it’s known, established a formal mechanism for rehabilitating a business in bankruptcy, and created a public office responsible for the administration of insolvency proceedings.
“The BIA was designed to help banks be more accountable to businesses: it protects the borrower significantly more,” said Gary Awai, Senior General Manager of the Corporate, Commercial and Treasury Unit at Development Finance Limited. “Before, [banks] could just come in and take assets. Now, they have to show they have a plan.” And, he added, they have to do just about everything they can to help the borrower before they step in.
The BIA has significantly helped small business owners by giving them some peace of mind, should their enterprises stumble. It has also been important to the country as a whole: the BIA’s proclamation helped seriously boost T&T’s ratings in the World Bank’s annual Ease of Doing Business rankings, allowing for increased international investment in the country.
SMALL STRATEGIC STEPS
It still happens, though. Business owners confronted with shrinking revenues begin to miss payments on their loans. In the face of major obligations, declaring bankruptcy and clearing the slate seem like the best route. But what comes next?
The main issue—for anyone, but particularly those who hope to once again own a business and take out loans—is your credit history. Banks and other investors are very unlikely to lend money to an endeavour that has recently declared bankruptcy.
An entrepreneur’s credit history is laid out in a credit score, something that is still only now becoming familiar in T&T. Companies like TransUnion provide scores for individuals and businesses based on several elements: the number of accounts open, including long-term loans like mortgages as well as revolving credit lines such as credit cards; the status of these accounts; and their balances, credit limits, and payment details.
Payment history is the most important component, followed by credit utilization—that is, how much debt a person or business is carrying in proportion to their credit limit. And unfortunately, the damage done by missed payments on a loan, for example, can remain on your credit history for years.
It stands to reason that to improve your credit score, you need to do better with all of those elements, particularly payment history and credit utilization. But how can you show improvements when no one will lend you money?
The answer is to think small, slow and strategic. Even tiny steps can gradually clear up a bad credit history.
If you haven’t already done so, split your personal finances from those of your enterprise. Create a business plan and give your company a separate phone line and bank account. And above all, make sure the firm’s financial records are impeccable.
Make payments on all credit card balances, but don’t close the accounts—that can look bad on your credit history. You may even want to use the credit card from time to time, but make sure to keep the balance below 30 percent of the credit limit; lenders are watching for that.
If you’re comfortable with increased credit, take out a small personal loan in order to show that you can handle it—but only if you’re sure you can make the payments reliably each time. And obviously, make sure to pay all other bills on time as well.
AN UN-STANDARD OPTION
But remember that key word: slow. This process will take years, not weeks. In the meantime, you can still grow your business, but you’ll have to be a little more creative. Ask family and friends to invest in your company; consider crowdfunding or peer-to-peer lending; find out whether your suppliers can extend credit to you.
You may also find that some local banks have standards that are more flexible than those used internationally. Those institutions may be interested in working with you even before your credit score substantially changes.
DFL, said Awai, is one of those. “I spent the better part of a couple months building an entirely new credit score,” he said. Instead of using an assessment based on Moody’s Investors Service’s ratings, as most international banks do, DFL examines more qualitative components, like a company’s management capabilities, strategic plan, and free cashflow.
“Moody’s is backward-looking,” said Awai. “I look at the proposed target market, the opportunities for going after something. I want to understand all the risks and how you’ll transcend them. What is the market doing, where do you want to go, is yours the best structure?”
It’s a different model, one that perhaps requires more of the borrower in the end, at least in terms of homework and planning. But it could be worth a try—especially for entrepreneurs who have found doors closed to them but are eager to get going.
Disclaimer: Development Finance is a non-bank financial institution licensed in Trinidad and Tobago under the Financial Institutions Act (2008) and registered with the Deposit Insurance Corporation. Savings and fixed deposits up to TT$200,000 are fully insured, but investments in securities are not DIC-insured and there is always the risk of losing money. DFL loans are subject to lender approval. In some stories, we feature remarkable companies that have made an impact on our economy, our communities and our daily lives. Featured companies are not all Development Finance clients.
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