New credit reporting laws could help SMEs

New privacy laws to be introduced by the Federal Government next year will make it easier for SMEs to analyse the credit history of a potential trading partner, an industry expert says.

The changes will also make it easier for individuals struggling to obtain finance for start-up companies who may have been affected by credit difficulties in the past.

The reforms will introduce four pieces of information to credit history files, including the type of each current credit account held, the data on which each credit card account was opened, each account’s limit and the data on which each account was closed.

The Government will also introduce a fifth reform that will see payment records included, but only if it is convinced “there is an adequate framework imposing responsible lending obligations in Commonwealth, state and territory legislation”.

The five separate reforms to the Privacy Act, which were announced yesterday by senator Joe Ludwig, were decided upon following recommendations from the International Association of Privacy Professionals.

“Australia’s privacy laws have evolved to form a series of overlapping standards at both the federal and state and territory levels, and between the public and private sectors,” Ludwig said.

Damien Karmelich, corporate affairs director for Dun & Bradstreet, says SMEs will “definitely” benefit from the reforms as they will make it easier to determine the credit history of a potential trading partner.

“If you look around the world, one of the groups that has really benefited from this type of credit reform has been the SME community. What this means is that if businesses are looking at a trading partner’s credit rating, you’re in a position to get more detailed information.”

Karmelich says the upcoming legislation will provide entrepreneurs with a better chance of obtaining credit, as lenders will be able to see the overall context of a credit history instead of just one or two negative experiences.

“The overwhelming majority of the community have never had a negative credit event in their lives, so those who have good behaviour now have the opportunity to showcase it. Currently credit reports only show negative events, but now these will show these events in context, and lenders can see your history of paying bills on time, etc.”

“When you look at credit providers around the world, especially in America, most of them use credit scores. Credit scoring is dependent on reasonable amounts of quantity information and quality, and one of the reasons SME lending hasn’t been vibrant is because credit scoring is limited. Now that is fixed, more lenders can give more to the market.”

Karmelich also says the laws will enable lenders to determine which individuals and businesses should not obtain credit.

“For some people who apply for credit and shouldn’t get it, part of the reason is because credit providers haven’t been able to understand their true level of exposure. If we can see someone applying for a fifth credit card, it’s a reasonable argument to make they shouldn’t be making that risk.”

The Government is also set to introduce proposals regarding changes to the credit reporting system that will require the development of a credit reporting code.