Category Archives: Credit

Beyond the Credit Bureau: Social Sourcing Your Creditworthiness?

Just when you thought it was hard enough to remain creditworthy as a small business owner or solopreneur, a new report published at American Banker highlights a potential banking trend that could change the way credit is built and maintained. According to the report that discusses nine trends affecting risk software in the banking industry, some banks have begun to consider additional data when determining a person’s creditworthiness.

 

 

So what exactly is this “additional data”? From the report:

One idea banks are toying with is that of incorporating social media data into assessments of credit risk, for instance, by considering the credit scores of a person’s friends in addition to that person’s own score. However, information posted on social media is not always 100% accurate. Under the Fair Credit Reporting Act, banks have to be able to verify customer data. “If I went on LinkedIn and said I have a PhD in astrophysics, which is not true, a number of people might comment on that, but the bank would still need to check that,” Jennings points out.

Though the use of social media to assess credit risk is still just in the realm of theory for banks, some small financial institutions, such as online microlender Lenddo, have already begun to experiment with the data.

While visions of social credit snobbery immediately fill my mind: “Friends with you?! Sorry, buddy, you’re credit’s too low!” It does raise an interesting question of how our social circles can relate to our ability to maintain good credit, and it may make you think a bit before accepting that new friend request.

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How Your Credit Profile Affects Your Business

We all know that good credit is highly sought after. And should we forget, those catchy little jingles are there to remind us, prodding with “free,” instant online credit reports. But once you find out what your score is, you may still be left wondering what exactly it’s good for, and more specifically, what does it actually mean for those who own their own business?

 

 

Your credit score is especially influential if you’re a small business owner. In today’s competitive market, poor credit can adversely affect your ability to conduct business in a number of ways: it can result in difficulty securing necessary financing and better interest rates, among other possible problems. Here is a brief rundown of some ways in which your credit profile can affect your business:

Surety Bond Premiums

Surety bonds act as risk mitigation tools to help ensure that business owners and other professionals follow all licensing requirements and industry regulations. Because a surety provider could potentially be liable for your inability to perform, they charge an issuance fee directly related to you credit score, which is usually a pretty accurate indicator of an individual’s reliability. Having a credit score above 700 will typically allow you to purchase a bond from a premium underwriter who can provide a bond at a competitive rate. Applicants with credit scores below 700 usually have to work with underwriters who will execute bad-credit bonds. These principals will pay a significantly higher rate that could range anywhere from 5 to 20 percent of the bond’s penal sum. Sometimes high-risk principals must also provide additional collateral upfront before securing the bond.

Loan Interest

Because your ability (or inability) to pay off past debts in the past directly affects your credit score, banks heavily consider your credit score when determining whether or not to back you with a loan. If a lender does approve you for a loan, the interest rate you will pay on the loan will be directly related to your credit score. Typically, the lower your credit score, the more interest you will pay on the dollar. If you have a good credit score, you should expect to pay a much lower interest rate on your loan(s). Of course other extraneous factors may affect the interest rate you will pay, but your credit score is a major influence.

Partnerships

If you’re starting up a new enterprise with a partner or a group of peers, be sure to inquire into each of their personal and professional credit histories. If you cosign for a loan, the lender will consider the credit score of all signing parties. How your credit scores are treated for those going into business as together is similar to when a couple gets married and decides to take out a loan for a new home: the two credit scores are combined and then averaged to calculate an appropriate interest rate. Similarly, if you need to secure a surety bond that includes both of your names on it, the surety provider will consider both of your credit scores before giving you a price quote.

Insurance Rates

If you’re looking to purchase an insurance policy for your business or for your employees, your credit score will be taken into account so that the insurance agent can predict how profitable you will be and thus how likely you will be to pay your insurance premiums. Insurance professionals check your credit scores frequently, especially when it’s time for you to renew or change a policy. Thus, keeping your credit score in check is not only important for initial price quotes, but for maintaining your payments at low, competitive rates.

When it comes to starting up your own business, thinking about your credit score can be intimidating. But keep in mind that if you make wise and careful decisions ahead of time, you can use your credit score as a tool for your advantage.

This article was written by Kristen Bradley at SuretyBonds.com, which is an agency that issues surety bonds across the nation. SuretyBonds.com aims to help new business owners get their enterprises started off on the right foot. For more information on the surety bond industry, check out the Surety Bonds Insider Blog: http://www.suretybonds.com/blog/.

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How to Fix Errors on Your Business Credit Report

Credit report inaccuracies can wreak havoc on your business’ credit score- and when they do the result can be disastrous. A business’ credit score is generally the deciding factor in the approval of most business loans and business financing. Moreover, prospective business partners, investors, and clients all may consider your business’ credit rating when deciding whether or not to enter into a transaction with you.

 

How can you reinstate your credit rating if you find errors? Here are some steps you can take to quickly contain and repair the damage:

  1. Ask for a copy of your credit report – If you think there are mistakes in your credit report, the obvious first step is get a copy of it. Ask for copies of your credit report from all three of the major credit bureaus (Experian, Equifax, and Transunion). They may be receiving different reporting data from your creditors.
  2. Be aware of the way errors can be created – There are various ways that errors can appear in your credit report. Sometimes computer errors cause creditors to send inaccurate information to the credit bureaus. At other times an inaccurate security number can cause a mix-up in identities, with you getting someone else’s credit score. The third possibility is that you are the victim of identity theft.
  3. Carefully check your credit report – You can examine your credit report after ordering a free annual report from all three major credit bureaus. Check it carefully for errors. Make sure that credit information of other family members is not mixed up with yours. And be aware that information that is over 7 years old can be removed. If you find errors, make a list of them.
  4. Contact the credit bureau reporting the inaccuracy – Call the credit bureau and report the inaccuracy. You may also want to prepare a letter with your name and address, state the item in dispute and explain why it is inaccurate. Then request a correction. Be sure to enclose photocopies of documents supporting your position.
  5. Contact the creditor – If the mistake is still in dispute between you and the credit bureau, notify the creditor himself that you are disputing him. Send him copies of all the documents you already sent to the credit bureau. From this point on, the creditor is obligated to include a notice of your dispute every time it reports this information to a credit bureau.
  6. Consider contacting a lawyer – If your findings are serious, it may be advisable to seek legal assistance.

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December 2, 2010

Three Tips to Securing a Biz Line of Credit that You May Not Know

Amid cautious consumer spending and an overall economic and legislative uncertainty, having a reliable source of credit and short-term financing is a necessity for small business owners. One of the more popular credit options among small businesses has been a bank sponsored business line of credit. But these days, many current small business account holders are seeing their credit lines being slashed or closed down, often with little reason or notice.

So how can a small business owner hope to secure a new business line of credit at the bank? Here are three tips that you may not of thought of:

 

Tip 1: If your credit score is low, consider the option of transferring 100% of the business to your business partner if he or she has a strong personal credit profile. The ownership transfer can be easily arranged and filed in the company’s records. Ownership can be transferred back once you complete the application for a corporate credit line.

Tip 2: Apply for a credit line below $50,000. Loans up to the $50,000 mark are approved much more easily than $100,000 ones, mainly due to the documentation and amount of financials required for the latter. If the credit line you seek exceeds the $50,000 mark, you will have to provide two years of personal tax returns, two years of business tax returns, profit and loss statements and financial statements. So think twice before going for the larger amount.

Tip 3: One of the lessons of the recent credit crunch is not to put all your eggs in one basket. Diversify your business credit and develop relationships with more than one bank. That way, if one bank reduces or cancels your line of credit, you will still have other options.

However, be sure not to open more than three business bank accounts within a 90-day period because the loans might end up stuck in the ratings systems (known as chex systems) which are applied by banks when opening up a business bank account.

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The Credit Card Reform Bill: Expect Many to Try Credit Card Alternatives

This post is the final part of a four-part series on credit card reform.

In the three previous posts, I discussed the possible affect of the credit card reform bill that was passed by the US Senate earlier this month. The bottom line for consumers and small businesses is that this new legislation will probably not have the desired affect its supporters had hoped for, and it may even lead to some negative consequences, such as smaller credit limits, higher fees, and less credit availability.

In response, many consumers and small businesses in search of credit will turn to credit card alternatives. Some will make this switch by choice, while others will do so because they have no choice.

Whichever category you or your small business falls into, you might as well familiarize yourself with some of the more popular credit card replacement options:

Credit Unions

Credit unions are basically small banks that are cooperatively owned by their members and run by the community at large. These local banks are generally more personable and they have the added benefit of limited interest charges as well as a vested interest in supporting the local community. They are a good place to turn for small business loans as well as personal lines of credit.

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Debit Cards.

Debit cards work just like credit cards and are accepted everywhere that credit cards are accepted. The only difference is that the money that you spend is immediately deducted from your bank account. Keep in mind, however, that if your card is lost or stolen, you risk losing the balance of money in your account.

Prepaid Credit Cards.

Like debit cards, prepaid credit cards work just like credit cards and are accepted everywhere that credit cards are accepted, but you have to put money into the card before you can use it. The major benefits to this method include more control over how much money is being spent and greater safety should the card be lost or stolen. The major drawback is that many prepaid cards charge a monthly fee in addition to a fee on transactions.

Bank Overdrafts.

A bank overdraft is a line of credit, much like a credit card, except it is directly connected to your bank account. A bank overdraft allows the account holder to overdraw the account up until a predetermined limit that is set by the bank. The outstanding balance may then be carried over from month to month, but it will accrue interest charges.

Charge Cards.

Charge cards work just like credit cards except the monthly balance made be paid in full each month. Unlike credit cards, charge cards do not have a monthly spending limit, and you can make an unlimited number of purchases. Many charge cards come with a yearly fee, and impose hefty penalties when the balance is not fully paid.

 

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The Credit Card Reform Bill: The Effect to Small Businesses?

This post is the third of a four-part series on credit card reform.

The consumer reaction to the credit reform bill has been taking the spotlight ever since the legislation was approved by the US Senate two weeks ago. Though the changes proposed in the new legislation will have some effect on consumer credit card usage, the under-emphasized fact is that smaller businesses (particularly those in retail) stand to bear the brunt of the fallout.

What makes small businesses special is that they are involved with credit cards both as a source of quick financing and as a way to extend credit and convenience to customers.

There has already been movement among the major business credit card issuers to drop their small business customers, or at the very least raise interest rates while reducing credit limits. My guess is that after the legislation goes into effect small businesses with good credit will see their rates continue to rise (albeit with greater disclosure) while their credit limits will continue to shrink.

Many of the “riskier” small businesses- those with bad credit and poor sales, or even those who have missed a couple of payments (how many small businesses out there these days don’t fit into this category?)- will have their accounts closed. In other words, they’ll just be dumped.

On the other side, the credit reform bill may result in a reduction in consumer spending by encouraging credit card holders to use cash or other credit card alternatives. Moreover, we can probably expect an increase in fees charged to retailers for processing credit card transactions.

None of this is good news for small businesses.

So what can small businesses do in response to the new credit card legislation? For one, small businesses must pay attention to any changes in credit card fee structures and incentives programs and then tailor their own credit terms and business practices around them. They should also look for alternative sources of quick financing, such as factoring receivables or turning to a community bank. It may take a little work, but it could shield a business from all the fallout.

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The Credit Card Reform Bill: What is the Expected Effect?

This post is the second of a four-part series on credit card reform.

Two weeks ago the US Senate approved a credit reform bill designed to protect customers overburdened by their financial obligations and subsequent poor credit ratings. But even after the bill was pushed through the Senate, one glaring question still remains: Will the credit reform bill help the nation’s current financial mess, or will it only make things worse?

I’ll put my bets on the latter.

While the more genteel voices of protest have been claiming that the credit card companies are engaged in a slew of unethical (or at least questionable) business practices, many unabashedly accuse the credit card industry with outright loan sharking, predatory lending, and deceptive advertising.

Though some of the practices in question may change as a result of the new credit reform legislation, the fact that the Senate failed to place a cap on interest rates is definitely a big win for the credit card companies, and I have no doubt that they will take advantage of it.

Moreover, bank officials and credit industry pundits have been threatening to make up for lost income generated by riskier borrowers by going after the people with good credit (to the tune of reinstating annual fees, curtailing rewards programs and charging interest immediately on purchases). My feeling, however, is that most of it will just turn out to be a lot of hot air.

The credit card industry is in the business of making money, and it will stay that way. What we can expect instead is a transformation. Though it may be a little harder to get a new credit card once the new legislation goes into effect and it may even be a little less convenient or a bit more expensive for those who have it, the credit card companies will eventually devise other methods for incentives and “rewards” programs that will encourage people to keep spending.

In short, my guess is that the credit reform bill will result in a great divide. Those with sterling credit will just use their cards less, which may result in less consumer spending. On the other hand, those with moderate to poor credit will still be stuck in the same debt mud- just under slightly different terms and conditions.

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The Credit Card Reform Bill: What are the Changes?

This post is the first of a four-part series on credit card reform. The next three posts in this series will discuss the expected effects of the credit reform bill in general as well as how credit reform may effect small businesses in particular. The series will then end off with some credit card alternatives.

Two weeks ago the US Senate approved a credit reform bill designed to add a level of regulation and control to the credit card industry which many proclaim is aimed at trapping its customers in a cycle of debt with unfair business practices and deceptive credit card offers. Here is a summary of the major changes approved by the Senate:

  • Interest rates cannot be raised during the first year of an account, and promotional rates must be in force for at least six months. After this time, should the credit card company choose to increase the interest rates, then customers must be notified about these changes at least 45 days in advance.

 

  • A customer must be over 60 days late on payments before the interest rate can be raised on the remaining balance. If the customer then pays the minimum payment on time for six consecutive months, then the rate must return to its previous level.

 

  • Bills can be paid online or over the phone without generating processing fees.

 

  • Over-limit fees are prohibited unless cardholders are told that the purchase will put them over their limit and they authorize it to go through anyway.

 

  • If your card has more than one interest rate on balances, for example one for purchases and one for transfers, then partial payments must be applied to the highest interest rate first.

 

  • Gift cards and gift certificates cannot expire within five years of activation, and issuers are banned from charging dormancy or inactivity fees on gift cards for unused amounts.

 

  • Credit card statements must be mailed out 21 days before the payment is due.

 

  • If the credit card company gets a payment by 5 pm on the due date, then it is considered “on time.” Also, no more late fees if the due date is a Sunday or a holiday and the payment does not arrive until a day later.

 

  • Individuals under 21 will need an adult co-signer on their cards unless they can prove that they have the means to make payments on their own. They must also get permission from parents or guardians to increase credit limits.

 

  • Credit card agreements will have to be posted on the internet

And what is missing…

The Senate rejected a proposal to cap credit card interest rates at 15%. Many claim that this measure was needed to “put real teeth into an otherwise solid bill.”

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May 19, 2009

In Trying Times, Smaller Businesses Are Considering Credit Insurance

It used to be that credit insurance was exclusive to the large companies that could afford to pay the high premiums in exchange for a bit of financial peace of mind. Not any more. In response to the economic slowdown and an across-the-board reduction in consumer spending, now even small and mid-sized businesses are considering this risk management tool.

Credit insurance, also known as business credit insurance, protects the insured business from customers who pay late on their invoices or who become insolvent. Though insured businesses cannot get money up front, as in the cases of factoring or invoice discounting, credit insurance provides a safety net that protects these businesses from the financial suffering incurred due to a debtor’s protracted default, insolvency or bankruptcy.

Generally, companies that accrue a few million dollars in yearly revenue can get credit insurance. Small and mid-sized business owners should keep in mind, however, that premiums vary greatly depending on the size of a business and its industry as well as on the credit terms that the business extends to its customers (i.e. are invoices payable within 30 days versus 90 days).

Even so, credit insurance may be worth the cost for smaller businesses in exchange for the peace of mind it brings in these financially turbulent times.

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Tips for Conducting Business Background Checks

In response to the current economic situation, many businesses are being more deliberate when it comes to deciding who to work with and hire. This includes their relationships with other businesses. Not surprisingly, conducting business background checks is fast becoming a standard practice among companies big and small.

Getting information on potential business partners or clients is important- especially for small businesses. Knowing about a company’s credit rating, financial status, reputation, and legal standing can help business owners and their management avoid risky business-to-business transactions.

Here are few tips for conducting effective business background checks:

  • Start with a simple Internet search. By doing a search on the business’ name you should get an initial glimpse of its web presence. This includes the business web site as well as any other posted articles or references. This is a good place start your background check.

  • Check out the company’s local reputation and references. Ask the business for a list of current references. This list may include clients, partners, vendors and creditors. Make sure to get in touch with at least three of the references provided. You can also check out the local Chamber of Commerce and Better Business Bureau to see if they have any information on the particular company.

  • Look at the company’s business credit report. The three credit bureaus, Experian, Equifax and TransUnion, as well as Dun & Bradstreet provide extensive credit and financial reporting on millions of companies. Armed with this information, business owners can assess another company’s operational health and its ability to pay off a debt. For a fee, any business seeking this kind of information can open an account with each of the credit reporting agencies.

  • Conduct a legal background search. Search for any lawsuits, judgements, liens, and bankruptcies connected with the company, as well as any criminal records held by its owners or management. Usually this information is available at the local courts. Click here for a listing of court websites. You can also consult the Office of Foreign Assets Control’s (OFAC) Patriot Act Search Database for criminal backgrounds on both individuals and companies. This is a government watch list of criminals and terrorists collected from databases around the world.

  • For publicly held companies, consult the SEC. The Security and Exchange Commission provides financial and business information about publicly held companies via EDGAR the Electronic Data Gathering, Analysis, and Retrieval System. All companies, foreign and domestic, are required to file registration statements, periodic reports, and other forms electronically through EDGAR. Anyone can access and download this information for free.

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