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Failed company directors ‘more likely to run risky personal debt’


Dodgy consumer credit behaviour is a reliable indicator of poor business acumen, research finds.

By Philip King 11 minute read

A director with a dodgy consumer credit history is almost three times more likely to be involved with multiple business failures than one with an unblemished record, research by credit bureau illion finds.

It said the findings confirmed a strong relationship between the personal credit behaviour of directors and the likelihood of their business failing, and why it was important for suppliers and customers to assess both.

“This strong relationship between consumer and commercial risk suggests that consumer credit information is an effective indicator of commercial risk, especially when limited relevant commercial behaviour is available,” it said.

Illion general manager of commercial risk Tony Meredith said high-risk directors might put saving their business ahead of servicing personal credit.

“The true risk of the business may be initially uncovered from their overdue personal credit when say, mortgage repayments are missed, credit cards limits are maxed out and consumer loans are taken out to prop up the business if business credit dries-up,” he said.

“Commercial lenders, suppliers and creditors to SME businesses and consumer lenders to the self-employed should consider both the commercial behaviour of the business and the consumer behaviour of its directors to get a clear understanding of the risks.”

The report found directors with a high risk of consumer credit default were almost twice as likely to be connected to a business that failed and close to three times more likely to be connected to multiple business failures compared with directors with an unblemished credit history.   

At the same time, directors who ran a business that previously failed were 60 per cent more likely to now operate a business with a high risk of collapse.

Directors involved with food services such as cafes, delis, restaurants and take-away outlets were the most likely group to hold personal credit cards, loans or home loans at high risk of default. 

The analysis showed 9 per cent of food businesses were controlled by directors with a high risk of defaulting on their personal credit, substantially higher than all other sectors.

In construction and transport the figure was less than 6 per cent while in retail and professional services it was 5 per cent.

Young businesses – less than three years old – also had a much larger proportion of high-risk directors at 14 per cent in construction, 15 per cent in food services and 18 per cent in transport.

“Young businesses may be controlled by directors with less personal wealth, where personal borrowings may need to be used to fund business activities, where directors are less able to draw on the business’s profits to fund both their personal lifestyle and to reinvest in the business, and where their inexperience alone places the business at a higher risk,” Mr Meredith said.

“Similarly, the inexperienced director may have a propensity to use available credit for funding their personal lifestyle when cash flows from their business activities are tight.”

“Our research suggests that this director risk initially shows up in the business’s operational activities on some occasions and in the director’s personal profile on other occasions. When it is the latter, the director’s personal risk offers vital insight into the risk of the business.”

He said the findings “strongly suggested” that financial risk was pervasive, affecting both business viability and an individual’s personal credit standing.

“While the business’s viability will impact on the personal wellbeing of its directors, we have also seen that the opposite is also true: that struggling businesses can be controlled by directors that struggle to manage their personal finances,” he added.

“Suppliers and creditors would benefit from knowing a director’s personal credit behaviour when limited information is available on a business.

“In addition, where the consumer behaviour pre-dates a business’s problems, visibility to this consumer behaviour would become essential if needing to manage exposure to this risk. This is especially important in the SME sector, where the business’s performance is generally just a veneer to the director’s underlying risk.”

The illion research relied on anonymised credit information from its database of 8 million commercial entities and 20 million Australians.


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Philip King

Philip King


Philip King is editor of Accountants Daily and SMSF Adviser, the leading sources of news, insight, and educational content for professionals in the accounting and SMSF sectors.

Philip joined the titles in March 2022 and brings extensive experience from a variety of roles at The Australian national broadsheet daily, most recently as motoring editor. His background also takes in spells on diverse consumer and trade magazines.

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