Americans normally associate credit repair with people who have bad credit in most cases. Closer to the truth, however, is that nearly everyone needs to engage in credit repair at some time in their lives, and occasionally more than once if they really care about their credit.
Of course, it’s usually most necessary for those with low credit scores. But even if you have an average or good score, you may want to increase it even more, either to improve your chances of being approved for certain loan, or getting lower costs and better terms.
There may be some element of vanity in wanting to have the best credit scores possible.
But in financial terms, your credit score really does impact your bottom line. For example, a credit score of 700 might get you the lowest rate on a home mortgage, while a score of 550 may result in a decline.
No matter what your current credit situation is, sometimes you need to do more than just make your payments on time. You may need to work on getting some negative information removed, or restoring your debts to get your credit scores higher.
Each represents a form of credit repair, and that’s exactly what we’re going to discuss in this article.
What Is Credit Repair?
Credit repair starts out with two basic objectives:
Eliminating Your Negative Credit Tradelines
The process starts with getting a copy of your most recent credit report and examining each line item. If any are showing negative information, those are the ones you want to zero in on.
In looking at the negatives, the first goal is to scan for any that may be in error. These can include collections that are not yours, accounts with negative payment histories that belong to someone else, or open balances you’ve long since paid.
By getting this information corrected, or removed from your report, your credit score will get an instant boost.
One of the biggest potential negatives that’s vague to most consumers, is excessive credit utilization. This is determined by what’s known as your Credit utilization ratio. That’s the amount you owe on your credit lines, divided by your total credit limits.
For example, let’s say you have five credit cards with a combined credit limit of $20,000. If you owe a total of $15,000 across the five cards your credit utilization ratio is 75% ($15,000 divided by $20,000).
A credit utilization ratio of 75% is considered excessive, and will weigh down your credit score. Credit utilization is the second biggest credit score determining factor, behind only payment history. It accounts for 30% of your score, so keeping this number at a reasonable level is mission-critical.
A credit utilization ratio of 80% or more is considered indicative of potential default, since you’re approaching maxing-out your credit cards. The lower the rate is, the better. But a ratio below 30% is considered ideal. If you have a good credit score, and you’re looking to improve it, getting the ratio below 30% may be the most important strategy.
Increasing Your Positive Tradelines
Increasing your positive credit tradelines can be equally important. Often times, a credit score is weighed down by a lack of good credit. It can even be held down by an absence of sufficient credit.
If you already have good credit, you’ll naturally want to continue making your payments on time.
But one of the best ways to increase your score is by paying off a loan or a credit card We’ve already discussed the importance of credit utilization, and that certainly needs to be considered if you want to improve your score.
But paying off a credit card completely, Open up a small credit account at a local jewelry store or an installment loan, is a way to boost your score a few points immediately.
The credit bureaus like paid loans, because they confirm successfully completed credit obligations. The more of them you have, the better. This isn’t to say that you need to pay off all your loans. But your credit report should reflect a healthy mix of both open and paid loans.
If you have poor credit, you certainly need to work on removing as many negative items as possible. But it’s equally important to add good credit to the mix.
You can do that by taking small loans, making the payments on time, and paying them off early in most cases.
What To Do if You Can’t Get Approved for New Credit?
If you’re unable to get approved for traditional loans or credit cards, look into secured credit cards or credit builder loans.
Secured credit cards usually require that you put up an amount of money equal to the credit line as collateral.
Because the line is completely secured, the bank is highly likely to approve the credit line. But we honestly do not recommend those because it automatically flags you in the red zone when creditors look at your credit.
Credit builder loans can accomplish the same goal, except you can open one without any money at all. Many banks and credit unions offer credit builder loans.
You apply for a loan, and when the bank approves it, the funds are immediately deposited into a savings account to act as collateral for the loan.
Your monthly payments on the loan are paid out of the savings account. Since it happens by automatic draft, the payments are guaranteed to be on time.
It will happen completely out of sight for you, and will likely cost you less than $100 for the interest on the loan. Meanwhile, the bank will report your perfect payment history to the credit bureaus, as well as the paid loan status when the term ends.
Either method will enable you to add good credit that can work wonders to increase your credit scores.
Take the next step and contact us today for your free credit analysis at 1-800-998-3452
Most entrepreneurs think that because they have bad credit or no collateral that there is no chance of them getting a loan. But in reality, there are actually many different financing options that business owners have in which they can qualify, even with severe credit challenges, or even if they don’t have collateral.
As you already know, banks REQUIRE good credit AND collateral to get approved for business financing. But still, most people only go to their bank when they need money, because it’s the only place they know to go to. But the most common business bank loan, SBA loans, only account for 1.1% of all business loans (Department of Revenue 2013). The reality is that the big banks are NOT the suppliers of most business loans. And even though they require good credit and collateral to qualify, many sources don’t.
The big banks are very conservative, as most know. Due to this they commonly won’t lend to businesses in which the business owner has challenged credit or businesses that don’t have collateral. But businesses can succeed even if the owner doesn’t have perfect credit or doesn’t have assets that can be pledged as collateral. And many business loans make really good sense and have risk low enough based on other factors, even if the owner doesn’t have good credit and lacks collateral. So what types of funding can and can’t you get with credit issues or if you lack collateral?
Before you know where to go to get money if you have credit problems, you first should know where NOT to go. These sources might be appealing based on their offers and promotions, but they will not typically lend money to you if you have challenged personal credit. SBA loans, conventional bank financing, private investor money and unsecured financing, all have stringent credit requirements.
Where NOT to Get Financing with Bad Credit or No Collateral…
SBA and other bank conventional loans are tough to qualify for because the lender and SBA will evaluate ALL aspects of the business and the business owner for approval. To get approved all aspects of the business and business owner’s personal finances must be near PERFECT. There is no question that SBA loans are tough to qualify for. This is why according to the Small Business Lending Index, over 89% of business applications are denied by the big banks.
Many people think that when they have bad credit or lack collateral, a private investor is the best answer. But in reality investors typically want average or better credit of 650 scores or higher in most cases, and they almost always want you to pledge some type of collateral. They will also want solid financials for at least two years. This means they’ll want to see tax returns showing large net profits that are increasing over time. Think of private money as being for SBA and conventional bank loans that just miss the mark.
“Unsecured” means no collateral is required for approval. No collateral GREATLY increases a lender’s risk. No collateral requirements usually means it’s the quality of credit that determines qualification. Any type of financing that has no collateral requirements AND no cash flow requirements, WILL require good credit to qualify.
Where To Go to Get Financing with Challenged Credit or No Collateral?
Revenue based financing, asset based financing equity financing crowdfunding, business credit, and unsecured financing using a credit partner/personal guarantor, are all great funding options for any entrepreneur with personal credit issues or those who lack collateral.
The truth is, there is a LOT of capital out there that business owners can obtain, even with personal credit issues or no collateral. And most of it isn’t available through big banks. And the great news is that you can qualify for this massive amount of available financing based on your business strengths, as long as your business has even one strength. The big banks require your ENTIRE business and you to be near perfect to get money. But as you’re about to discover, there are a lot of other sources who will lend you money, even lots of money, based just on one strength. So as long as you have a strength to offset your weakness of having bad credit or lacking collateral, you can be approved. This is often called compensating factors.
Cash-flow Based Financing
Many businesses have already proven “concept” and have consistently increasing sales. Their strength is that they have shown stability and that they can effectively run a growing business. The risk to the lender is less as they are established businesses that are growing. How are your sales? Sales are the difference between an untested concept or idea, and a real operating business. Will your idea be well received? Do YOU know how to operate a business? Sales answer these questions.
If you have consistent sales, the next question is does the business have existing cash flow proven by bank statements? There are lending options available that only require a quick bank statement review for approval. They won’t even need to look at your tax returns, so even if your business shows a loss you’ll still be okay. The next question is does the business have over $60,000 annually received in credit card sales? Does the business have over $120,000 annually going through their bank account? If the answer is yes then revenue financing or merchant advances might be the perfect funding product.
For this type of “cash flow” based financing you must be in business six months. No startup businesses can qualify. You should have at least 10 monthly deposits or more going through your bank account, not just a few larger deposits. Most advertising you see for “bad credit business financing” are these products. These are short term “advances” of 6-18 months. Mostly short term at first, such as 3-6 month terms. Then when half is paid down lender will lend more money at a longer term, such as 12-18 months. Loan amounts typically go up to $500,000. Your actual loan amount is based on your revenue, usually you can get lent 8-12% of annual revenue, based on your verifiable revenue per your bank statements. For example, a company that has $300,000 in sales might get a $30,000 advance initially.
With revenue and merchant financing 500 credit scores accepted and are COMMON with this type of lending. Bad credit is okay as long as you aren’t actively in trouble such as in a bankruptcy or have serious recent and unresolved tax liens or judgments.
For this type of cash flow based financing rates of 10-45% are common depending on risk. Risk factors include: Industry, Time in business, Bank statement details – number of deposits, average daily balance, NSF charges, amount of deposits monthly, and credit quality. Usually rates are higher on first advance until you “prove” yourself to the lender. No tax returns are required, no other income docs are required, and no collateral is required.
And, you won’t need to pledge any collateral to get approved. Although you will typically be required to supply a personal guarantee, which is required for almost all business financing that isn’t accompanied by collateral.
Asset Based Financing
Asset based financing, also called collateral based lending, lends you money based on the strength of your collateral. Since your collateral offsets the lender’s risk, you can be approved with bad credit and still get REALLY good terms.Common BUSINESS collateral might include account receivables, inventory, and equipment.
With account receivable financing you can secure up to 80% of receivables within 24 hours of approval. You must be in business for at least one year and receivables must be from another business. Rates are commonly 1.25-5%.
You can also use your inventory as collateral for financing and secure inventory financing. The minimum inventory loan amount is $150,000 and the general loan to value (cost) is 50%; thus, inventory value would have to be $300,000 to qualify. Rates are normally 2% monthly on the outstanding loan balance. Example is a factory or retail store.
With equipment financing lenders will undervalue equipment by possibly up to 50% and work with major equipment only. Lender won’t combine a bunch of small equipment, and first and last month’s payments are required to close. Loan amounts are available typically up to $2 million dollars.
Common PERSONAL collateral that can qualify for collateral based lending might include a 401k and stocks. 401k or IRAs can be used to obtain up to 100% financing and rates are usually less than 3%. A retirement plan is created allowing for investment into the corporation. Funds are rolled over into the new plan. The new plan purchases stock in corporation and holds it. The corporation is debt free and cash rich.
With securities based lines of credit you can obtain an advance for up to 70-90% of the value of your stocks and bonds. These work much the same as 401k financing with similar terms and qualifications
Equity Financing and Crowdfunding
With equity financing you exchange a percentage of ownership in your business for financing, much like on the TV show Shark Tank. Personal credit is NOT an issue nor will you need to provide collateral, but equity investors are looking for a tested and proven concept and sales really help approval. You might find some investors to invest in a concept only, or invention. But most will want to see that you have an operating business that’s earning money and making profits.
And expect that they’re going to want a large piece of the equity. For it to be worth their time to invest, they might want 10-60% ownership of your business. That means they’ll be taking a large part of your future earnings, something you want to consider before recruiting an investor.
There are lots of websites in which you can obtain crowdfunding for your business. This type of funding gathers money from a “crowd”, or a lot of people instead of one big investor. If the crowd likes your idea, they may donate money to your project. Much of crowdfunding doesn’t need to be paid back and many investors are people you know. But if you really look into crowdfunding, you’ll find there are all types available.
Some types of crowdfunding sources do want a certain percentage of return; some want a percent of equity ownership. And there are different sources and platforms for different needs, and even unique niches or industries. So make sure you find the right crowdfunding platform for you before you post a project.
Business Credit and Unsecured Credit
Business credit is a great way to get money as approvals are not based on personal credit and no collateral is required for approval. Business credit reports usually get started with a few vendor accounts who will initially offer credit. Initial accounts create tradelines and a credit profile and score are established. The company’s new profile and score are used to get credit. Newly obtained credit is based on the company’s credit per the EIN, not the owner’s credit based on the SSN. Personal credit doesn’t matter as the credit linked to the EIN is used for approval.
When you use vendors to build your initial credit, you can then leave your SSN off of the application and can apply for business credit based solely on your EIN at most retail stores. Plus, you can get cash credit also, like high-limit cards with MasterCard and Visa. But building business credit all starts with vendor accounts. Without them, you won’t be able to start your credit profile initially, and that profile being established is the key to getting cash and store credit cards for your business.
Once you find the vendors you want to apply for, apply, and use your credit, it takes about 1-3 months for those accounts to report to the business bureaus. Once those accounts are reported a business credit profile and score are then established, and that can be used for you to get store credit cards next. Once you have about 10 payment experiences reporting, you can then start to get cash credit like Visa and MasterCard accounts. A payment experience is the reporting of an account to one business bureau. So if an account reports to two bureaus, it would actually count as two payment experiences.