I have a friend of mine who started her business way back in 2011. Over the years she has managed the business through debt financing. As we all know every business has it's ups and downs. High competition led to a reduction in the number of her clients making it hard for her to settle her loan installments because the business was not making enough profit. Her loans were marked as default and her name listed with the credit reference bureaus. Her business is now slowly dying because she cannot be funded by any financial institution. Her story got me thinking about which party the credit reference bureaus favour. Is it the financial institutions or is it the customer? Am sure you will agree with me that customers do not directly benefit from the credit reference bureaus. Some financial institutions have been misusing the bureaus. My friend for example got listed with the bureaus for not paying one installment. Just one. This led to her being denied loans by other banks. Financial institutions should evaluate their clients first before listing them with the bureaus. A client who paid her loan installments promptly and due to some reasons failed to pay his or her installments for a month or two shows that there is a reason to it. Financial institutions should care about the welfare of their customers. They should look at the reasons why this customer has been failing to repay her loans and help the customer get back to their feet. Credit reference bureaus should be used by financial institutions when the customer totally refuses to repay the loan and doesn't come to the bank to explain his or her financial position.
Credit reference bureaus exist to provide financial institutions a systematic way to grant or deny credit. In other words, their customers are the financial institutions, not the borrowers. Financial institutions don't just provide bad feedback about their customers/borrowers, they provide pertinent credit information such as outstanding loan, collections, credit history, any tax liens, repossession, or foreclosure. The moment you've been approved for a loan or a credit card, you can be sure that you'll get yourself listed on the credit bureau. That is why those who don't have loans or credit card typically have no credit rating. As for your friend, it seems that there is more to her case than just missing an installment or two, although that can be a factor if the loan agreement defines missing one or two installments as default. If she had been relying on her debt financing to operate her business, she may have reached debt levels that are far beyond her perceived capacity to pay leading to the denial of her loan application. If she had been relying on debt financing over the years, this only proves that her business is not sustainable. The fact that she defaulted once or twice may have just proven that her credit worthiness had been impaired. Your friend's experience proves that is it never safe to rely on debts to finance a business.
@Jamille. The credit reference bureaus should be regulated in such a way that it's customers are not only the financial institutions but also the borrowers. I agree with you that debt financing is not the best way to fund a business but it's the quickest way to solve a business problem. This is so long as you incur debt that can be serviced by the business.
Financial institutions pay the credit reference bureau to get the overall picture on a loan applicant. Borrowers don't. Credit bureaus merely provide the information, it's the financial institution that makes the final decision. Rejecting a loan based on a borrower's repayment record is not a misuse of credit bureau information, but a standard business decision. It's the bank's money, after all, and the management is accountable to the bank's owners. Banks are not charitable institutions. In the first place, we're not even sure if the reason for the loan rejection was your friend's failure to pay one or two installments. Banks typically don't disclose the reason for rejecting a loan. The reason may have been the outstanding loan balance versus her capacity to pay based on her assets and the financial standing of her business, which, as you mentioned, have not been making profits lately. In a way, credit reference bureaus help borrowers by preventing them from acquiring loans that are beyond their capacity to pay. They also allow banks to offer low interest loans to borrowers with high credit ratings.
