Bad Credit And The Costs Of Financing

Bad credit has usually terrible consequences for the finances of those that suffer it. Particularly, when it comes to obtaining funding for any purpose, the costs associated with financing for those with a bad credit score or history are significantly higher than that of those with a regular credit for similar financial products. The costs are also affected by other variables like the type of product under consideration but the credit score issue is probably the most important factor.

Knowing how credit score affects the costs of financing will not solve the problem. Yet, it will let us analyze and find the tools available for counteracting the consequences of a bad credit score on the costs of financing. These tools are available to most applicants and imply certain sacrifices but they will provide the necessary remedies against this problem and eventually let the applicant to repair credit and obtain more advantageous conditions on financial products.

How Credit Score Affects The Costs Of Financing

The main variable that affects the costs of a certain loan type is the default ratio of that loans. It may sound unfair since you are an individual and you do not plan on defaulting on your loan. However, lenders do not know that for sure and there is absolutely no reason for them to have faith. The business rests on probability and statistics. Thus, bad credit loans which have a higher default ratio imply higher costs for financing.

The variable is risk and higher risks imply higher costs. That is the reason why lenders require higher returns. It is the only way to compensate for these risks. Fortunately it is possible to counteract this risk with measures that compensate the higher costs associated with a higher default ratio by reducing the risk of the transaction. These measures are mainly: securing the loan with an asset, improving the credit score or providing a co-signer.

Reducing The Risks, Reducing The Costs

As explained above, the risks of the transaction determine its costs and thus, reducing the risks implies reducing the costs. Providing security can significantly reduce the interest rate charged for the financial transaction. Sometimes, secured loans when compared with unsecured loans feature an interest rate that can be as low as half the rate. Thus, the costs can be reduced by 50% and sometimes even more.

Improving the credit of the applicant prior to applying is also a way of reducing the costs of financing. However, there is not always enough time to do so if you are going through an emergency and you need the funds fast. If that is the case, there is an alternative that you may want to consider: To avoid this being an obstacle, the bad credit applicant can use the aid of a cosigner. The co-signer will apply too and his credit score (that must obviously be better) will be taken into account too thus reducing the risk implied because in order for the lender to lose the investment both the main applicant and the co-signer would have to default on the loan.

Having Your Own Business Credit Has So Many Benefits!!!

When you have business credit you DOUBLE your borrowing ability! Not only will you have access to the consumer credit you have now, but you will also have an entire other credit profile for your business that you can easily use to get the same credit and more all in your business name.

And per the Small Business Administration (SBA), approval limits on business credit accounts are 10-100 times that of consumer credit! Forget doubling your available credit, how about increasing it by 10-100 times!

And speaking of SBA it’s very important to mention that if you even think about applying for any business funding you will need to have an established, positive business credit profile. It’s a must, and something so essential that SBA says right on their website that you should “be prepared to submit a credit report for your business” with any SBA financing.

SBA requires that you have good personal credit, good business credit, and good bank credit to get approved. And in the Business Credit Building Course you will not only build your business credit but you’ll also get insight on how your bank credit works, something only TOP entrepreneurs even know about.

With the Business Credit Course you will be able to build your business credit, this is credit that has NOTHING to do with your personal credit.

Did you know that 30% of your consumer credit score is dedicated to utilization, the percentage of your available credit that you are actually using?

That means if you have a $1,000 credit card and owe more than $300 on that card your credit scores will actually be lowered. I have personally seen credit scores lowered by over 100 points just because the consumer was over-utilizing their revolving accounts. Any balance you owe over 30% of the limit will hurt your scores. Plus new inquiries affect 10% of your scores, so even applying for the new credit can hurt you!

These are just more reasons smart entrepreneurs build business credit and don’t use their personal credit for business purposes.

What Funding Programs are Looking For in a Business

There are some very specific things that any lender, whether it is a bank, a venture capitalist or other type of backer looks for in a business. Probably the very first thing is respectability found by looking for proper set up procedures, affiliations and identification numbers. Then of course the obvious: credit ratings. Here at Business Fundability, our goal is to help you develope a strong business credit rating for your business.

Above and Beyond the Numbers There’s something equally important to the ratings and number involved in determining business fundability, and that’s stability. Businesses come and go in today’s economic environment. Lenders want and need to know that you will be around over the course of the loan. Since most loans take many years to pay in full, there’s a lot of investment involved on the lender’s part. The best way to prove stability is to have a strong, reasonable business plan. A business plan maps out your course of action, lays your cost of operation bare so that you and your lender can tell how much it will cost to make a profit, and how reasonable those profits are.

On top of that, a business plan gives a well-rounded overview of all of the people involved in your business and what their skills are to get you to where you need to be. The Company You Keep Lenders won’t stop at your business plan to find out how stable and respectable your business is. For real business fundability you need to establish good working relationships with other businesses and have a good reputation with your fellow business owners. If you have established clientele or customers it will show a good reputation with consumers as well. If you haven’t had a chance to develop any outside relationships with other businesses or developed a customer base yet, it will be harder to prove that your business is capable and reliable. Banks are the Bottom Line Yep, the banks hold the keys to your ability to get traditional loans.

While your bank rating may not have a lot to do with getting funding from some sources such as venture capitalists, if you want a bank loan a high rating. Bank ratings aren’t anything like credit ratings. You can only establish a bank rating by opening a bank account. It’s actually quite simple. Open an account in your business’ name using your EIN number for identification, deposit the minimum amount required by the specific account and keep your funds above that level at all times. Conduct regular business; paying your bills and depositing earnings into the account and within a few months you’ll have the start of your bank rating.