Yaneek Page | Entrepreneurs, beware! Your credit history is married to your business
A few years ago, the head of one of Jamaica's largest financial institutions stunned the audience of entrepreneurs and business executives when he said the following.
"No matter how profitable the business may be on the books, or how exciting a business plan you present to us, the deal maker or breaker will always be the creditworthiness of the principals, individually and collectively," he said. "You see, in our experience, people who have a history of not paying their debts manifest that philosophy in their business interests as well."
It was a jolting revelation for many who believed that financial institutions viewed limited liability companies as separate legal personalities in the strictest sense, as prescribed by law under the Companies Act.
The reality is that the credit history of the business owners is often married to the business.
I have come across several cases, particularly since the Credit Reporting Act came into effect in October 2010, where entrepreneurs received what they believed were provisional approvals of business loans, only to be denied upon further due diligence by the financial institution that included personal credit checks.
According to the Bank of Jamaica, the supervising authority for all credit bureaus, the credit reporting legislation is a framework that ensures credit reporting is executed "through reasonable procedures that meet the needs of commerce for credit information in a manner that is fair and equitable to the consumer."
A widespread practice in the financial industry in Jamaica is for financial institutions to issue business loans to companies on the condition that they are secured, at least in part, by personal guarantees from the company's executive directors. This is sometimes stipulated even where the loan is backed by security such as land or equipment.
What's more, your personal guarantee is also only as good as your creditworthiness. A personal guarantee, as required by some financial institutions, is a legally binding written promise from an individual to pay the loan principal and uncapped interest, penalties, fees and any legal costs incurred in recovering the debt.
Many borrowers commit to these guarantees without a full appreciation for the extent of their financial commitment and that their personal assets and professional liberties could be at risk.
The incredible irony is that the insistence of personal guarantees to back secured business loans defies the very spirit and substance of limited liability and the separation of legal personalities that is required for entrepreneurs to fulfil their role as central actors in a dynamic market economy, driving innovation, job growth and economic prosperity.
It is a paradox of which entrepreneurs must be aware, and guided by when they are considering how to finance the growth of their business and which financial partners are best aligned with the needs and nuances of their ventures.
Notwithstanding the perspective held by some credit managers that personal guarantees demonstrate confidence in the business and a firm commitment to satisfying the debt, it breaches one of the critical safeguards that has proven successful in promoting enterprise in many of the world's fast-growing and most prosperous economies.
Entrepreneurs need to familiarise themselves with their credit reports and status and how this information is being used by their financial institutions. It is important to validate whether the information is current and accurate as it is not uncommon for reporting institutions to make errors, or omissions, or to fail to remove satisfied debts in a timely manner, which can compromise credit information and disenfranchise prospective borrowers.
You can find detailed information on credit reporting in Jamaica, how to access and challenge information posted on your credit reports at BOJ's website - www.boj.org.jm.
Perhaps the most critical consideration for entrepreneurs is to safeguard their good financial standing, be ethical and fair in managing personal and business debts, and be wary of financial institution that flout the principle that a company has and is entitled to maintain a separate legal personality from its owners.
- Yaneek Page is an entrepreneur and trainer, and creator/executive producer of The Innovators TV series.