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Ways to Finance Your Business at Any Credit Score

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With the economy slowing in response to COVID-19, millions of business owners have seen their incomes drop and are increasingly relying on financing to help fund their businesses. In most cases, the financing options available are based on the business owner’s personal credit score, so it’s important to know what may work for you before deciding which to use.

How credit scores affect loan options

Before diving into the types of loans that work for good, average, and poor credit, let’s discuss how a business owner’s credit score affects their financing options.

While businesses can establish their business credit scores separately from the personal scores of their owners, this process takes years and lots of revenue. For the vast majority of small businesses, lenders assessing the loan application will look to the owners as the principal source of repayment. This means that the lender will want to consider the business owners’ personal incomes, assets, and liabilities as well as credit.

Lenders consider the credit scores of potential borrowers as an indication of the risk they pose – i.e., how responsible they are with credit. This, in turn, indicates how likely the borrower is to repay the loan, and whether the lender should consider them creditworthy.

Depending on credit score, some business owners only qualify for certain types of financing. If a business owner’s credit is too low (below 550 to 600), they may not be able to get a loan at all.

Business financing and changing credit

Even after you’ve secured a small business loan, your credit score is still important. Some loans include provisions that allow lenders to call the loan if your credit score or the value of collateral drops too much, though these loans are fairly rare.

More often, refinancing becomes far more difficult if your credit score drops after you secure financing, which may leave you stuck paying interest on a high-interest loan – or, if you have balloon financing, you could end up unable to refinance your balloon payment and have to pay it all at once.

If your credit score improves, you may qualify for a better loan or have the option to refinance your debt at a lower rate or for a longer term, drastically lowering your monthly payments.

Types of small business loans for each credit score

Type of financing Type of credit
Bank term loan Excellent
SBA loan Good
Business line of credit Fair
Merchant cash advance Poor

 

While you assess each of these options, it’s worth remembering that a borrower’s credit score isn’t the only determining factor in whether a certain type of financing is right for them or even if they’ll qualify. For each of these loans, there are other types of requirements as well, including time in business, revenue and debt-to-income (debt-service coverage) ratio.

In some cases, other nuanced requirements may also exist. Merchant cash advances, for instance, are only available for businesses that process credit card transactions, and SBA loans are only available for businesses that have been denied financing from other sources.

Bank term loans

When it comes to small business financing, bank term loans are the gold standard – as good as it gets. This type of financing is typically reserved for the most creditworthy borrowers – business owners with strong, reliable business revenue, excellent credit, and usually an established relationship with a bank.

With a term loan, a bank extends a direct loan to a business – the loan is not federally insured – and the business repays the loan through regular payments over a period ranging from five to 30 years.

While bank loans are ideal for small business financing, they’re extremely hard to qualify for, and because these loans aren’t federally insured, the interest rates aren’t always great for non-prime borrowers (if they even qualify). If you don’t have an established relationship with a bank, they often aren’t even an option.

Bank term loans are best for small business owners who want to do one of these things (or the like) with the funding:

  • Buy or expand their business facilities
  • Purchase new equipment, supplies or inventory
  • Buy another business or open a new location

SBA loans

For business owners who have good credit and want a term loan but don’t have the stellar credit or established relationships necessary to get a bank loan, the SBA is often a great choice. Borrowers still need to have good credit to qualify, though (600 to 640 is the minimum for most programs).

When it comes to SBA loans, there are many different options available. Most loans issued by the SBA are conventional term loans, but there are also lines of credit, microloans, grants and other options to fit a business owner’s particular circumstances. These options are usually offered at more attractive rates than business owners would get from other non-bank lenders.

One of the great advantages of SBA loans, in addition to the lower credit score requirements, is that these are still structured loans that can be repaid on set schedules. Plus, interest rates are still pretty good, since the loans are federally insured. Some extra costs are also associated with these loans, though, including an SBA guarantee fee, and underwriting can be a pain for borrowers who need cash quickly.

SBA loans are best for business owners with good (but not excellent) credit who want to do one or more of these things:

  • Buy new facilities or renovate facilities they occupy
  • Buy equipment
  • Create new jobs
  • Develop a new product line

Business lines of credit

If your credit isn’t quite good enough or you don’t have the revenue necessary to get an SBA loan, you may be able to find the financing you need with a line of credit. This type of loan is called a revolving credit facility, because it allows business owners to potentially borrow the same money multiple times, if they pay back part of what they owe after taking their original loan.

With a line of credit, business owners have a certain amount that they can borrow. They can borrow money against their line as they need it, then repay and actually borrow the same money again, so long as they’re still in the draw period (usually the first one or two years of their loan).

After the draw period for a line of credit ends, the business owner repays any amount outstanding on their line, often with fixed payments over five years or more.

While business lines of credit offer a lot of flexibility, they can still be tough to qualify for, because lenders know that the borrower’s financials may change and a loan could become riskier over time. Some lenders even include provisions allowing them to call the loan if the borrower’s credit score drops or collateral decreases in value – which can cause a business owner a lot of problems if they aren’t careful.

Business lines of credit are often used for these purposes:

  • Financing midsize purchases
  • Renovating facilities
  • Smoothing seasonal expenses
  • Accommodating recurring financing needs

Merchant cash advances

If your credit is poor and you need business financing, your best bet may not be a loan at all, but a merchant cash advance. This type of financing is available for businesses that process credit card transactions and is extended against future credit card sales. The lender then keeps a portion of future credit card sales until the advance is repaid with interest.

Merchant cash advances are pretty unique in the world of business financing. They’re easy to get and extremely easy to administer, but they’re also expensive, and they’re only available to businesses that process credit card transactions. What’s more, these advances can take a long time to pay back if you experience a period of slow or low-dollar sales.

These are some cases where merchant cash advances may make sense:

  • Buying inventory
  • Making payroll
  • Meeting personal expenses

Bad credit business financing options

If you have bad credit and need business financing, there are other loan options that may work for you. Business lines of credit and merchant cash advances can be quick and easy to get for some, but they aren’t an option for all business owners, and they aren’t always the best choice even if you can get them.

In addition to the financing options outlined above, here are some that might work if you don’t have strong credit:

  • Business credit cards: Small business credit cards work just like personal cards and are great short-term financing options for business owners who want to finance everyday purchases.
  • Bridge loans: These loans only last for a short term but can be great for businesses who are just waiting to resolve other debt or get paid by customers before refinancing into a long-term loan.
  • Personal loans for business: These loans offer a lot of flexibility in use of funds and are one of the best options for startups that haven’t been around long enough to meet most lenders’ requirements for minimum time in business.

There’s also invoice financing or factoring (which allow businesses to borrow against receivables), leasing, equipment loans, crowdfunding, and microloans for very small businesses with very small needs.

Improving your credit to increase your options

If your credit isn’t great and you don’t have financing options or don’t like the options available to you, you can take certain steps to improve your credit. The first thought most people have is to raise revenue, but that’s often outside your control. There are much simpler things that are more within your control and will help you expand your financing options.

Here are four things you can do to improve your credit and expand your business financing options:

  1. Consolidate outstanding loans. If you have multiple outstanding debts, consider consolidating them into a single, structured consolidation loan.
  2. Pay down revolving lines. Reducing your balances on debts like credit cards can help to lower your credit utilization rate and improve your credit score.
  3. Keep accounts current. Making sure that you don’t fall behind on any of your outstanding debt will also make sure you don’t get any new derogatory marks on your credit report and demonstrate to lenders that you are responsible with credit.
  4. Dispute negative marks on your credit report. If you have old accounts that are closed and have derogatory marks, they may be holding down your credit score. You can work with credit bureaus to eliminate these marks from your credit report and potentially raise your score quickly.

If none are these are options for you, you can always get a co-signer to guarantee your small business loan, or take on an equity partner to get the money you need. No matter your credit, there’s always a financing option available to you. Some are better than others, but there are always options.

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How To Find A Co-Signer For A Loan – Forbes Advisor

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If you need to borrow money and your financial situation isn’t the strongest, you might be able to boost your odds of approval by seeking out a co-signer. And on the flip side, if you have good credit and a strong income, it’s possible that someone might come to you and ask you to co-sign for their loan.

The truth is that co-signing on a loan can be a win-win for both parties, but it can also result in broken relationships, destroyed credit and financial hardships for the borrower and the co-signer. In order to forge a successful co-signer relationship, you need to know exactly what a co-signer is, how the arrangement works and how to dodge potential pitfalls.

What Is a Co-signer?

A co-signer is a secondary person who agrees to pay back a loan in case the primary borrower defaults (i.e., doesn’t pay it back). When you co-sign on a loan, the loan is recorded on both your credit report and on the main borrower’s credit report. As long as they make on-time payments, you’ll get the benefit of those marks too. However, if the borrower misses a payment or just stops paying on the loan entirely, you’ll be on the hook for the loan. And if you fail to pay up, the lender can actually take you to court for the money.

If you’re looking to borrow money, lenders generally require you to get a co-signer if you have bad credit or no credit, limited income or something else that makes you a lending risk. This is commonly the case for young people who are just starting to build their finances, and who may not have any credit history yet. For example, roughly 90% of all private student loans were made with a co-signer during the 2019/2020 school year according to MeasureOne, a data analytics company.

However, not all lenders accept co-signers, so if you have a limited credit history and think you’ll need help qualifying, it’s best to confirm with the lender before applying.

When a Co-signer Makes Sense

Using a co-signer on your loan can make sense in a lot of cases:

  • You have bad credit
  • You don’t have much income
  • You’re young and you don’t yet have credit in your name

Using a co-signer can help you overcome these barriers so you can get approved for a loan. You may even be able to get lower interest rates if you and your co-signer are approved.

But in order for this setup to work, you’ll need to have a few things in place:

  • Trust between the borrower and the co-signer. The borrower is asking a lot of the co-signer, and so you’ll want to make sure you trust each other.
  • The co-signer needs to have a good credit score. If the co-signer’s credit is the same as yours—or worse—they may not be approved to co-sign on the loan.
  • The co-signer needs to be able to pay the loan on their own. If the borrower defaults on the loan, a co-signer should be able to comfortably afford the payments on their own.

Co-signer vs. Co-borrower

A co-signer is someone who agrees to be a backup for the loan payments. A co-borrower, on the other hand, is someone who’s equally liable for each payment (i.e., before it’s past-due), and who typically also shares ownership rights for whatever the loan was for.

For example, a husband-and-wife team may be co-borrowers on a loan for a house and both listed on the title. This means they own the home equally, and are both responsible for making payments each month.

But if a parent co-signs on their kid’s car loan, they aren’t first in line to make the payments. The lender only contacts them for payment if their kid doesn’t pay up. They also don’t have any ownership rights in the car—even though they’re on the hook to pay for it.

How to Find a Co-signer

Just about anyone can be a co-signer. But since you both need to trust each other, it’s more common to use friends and family with whom you already have an existing and healthy relationship.

If you need a co-signer, make sure you consider who to ask carefully. This is a big ask of them. You’ll need to be open when discussing your financial situation, and they’ll need to be comfortable with disclosing their financial situation, too.

It’s entirely possible that your first choice for co-signer may not be able to comfortably take on the financial responsibilities. If that’s the case, you need to be able to let them off the hook gracefully. Even if they are financially able to co-sign for you, they may not want to take the risk, and you need to be understanding of that.

In fact, it’s entirely possible that you may not have anyone close enough to you who could be a good co-signer. In this case, it may be necessary to consider some popular alternatives to a co-signer arrangement.

Co-signer Alternatives

Not everyone is able to use a co-signer, and that’s OK. But that doesn’t mean you’re out of luck. Here are a few other options to try:

Shopping Around With Other Lenders

The world is full of all types of lenders, some of whom specialize in the types of loan applicants who traditionally need a co-signer. These “bad credit loans” can be a good (if expensive) alternative, but you’ll want to be careful here as there are a lot of shady lenders.

Here are two important things to ask of any bad credit loan lender:

  • What are the rates and fees? Avoid short-term payday loans, which typically charge APRs of 400%, compared to the average two-year personal loan at 9.34% APR.
  • Do you report to the credit bureaus? This will help you build credit, so you don’t need to rely on these types of lenders in the future.

Use Collateral

You might not have a person who can guarantee your loan, but you might have property. Collateral refers to something you own that you agree to give to the lender in case you default on the loan. If a loan has collateral, it’s called a secured loan. Common secured loans include auto loans, mortgages and even some personal loans.

If your lender allows it, you may be able to qualify by agreeing to use something valuable you own as collateral. But remember, if you put up your car as collateral, for example, and fail to pay the loan, your lender can repossess your car.

Ask Friends and Family

If your friends and family are financially stable and willing to lend you the money but prefer not to co-sign on a loan, consider asking them for the money outright. You could ask for it as a gift, or better yet, a loan that you repay back to them.

If you opt for the loan route, make sure you draft up a legal agreement of your own. This reduces the likelihood that your relationship will sour over time if your co-signer feels like they aren’t getting paid back according to schedule. You don’t want to be that family member they’re always hounding for cash.

Go to a Credit Union

Credit unions are often more willing to work with you than banks or other lenders. Of course, it’s not a free-for-all and you will need to meet their loan requirements. But if you’re having a hard time getting approved elsewhere, it might be worth stopping by a credit union in your area to see if they can help.

The downside is that credit unions have their own membership requirements which you’ll need to meet before you apply.

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Fall 2020 Brings Increased Regulatory Focus on Financial Institution Detection of Human Trafficking | Moore & Van Allen PLLC

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On October 15, 2020, the Financial Crimes Enforcement Network of the U.S. Department of Treasury (FinCEN) released its Supplemental Advisory on Identifying and Reporting Human Trafficking and Related Activity (Supplemental Advisory). The last time FinCEN provided guidance on identifying trafficking in anti-money laundering (AML) processes was in Guidance on Recognizing Activity that May be Associated with Human Smuggling and Human Trafficking – Financial Red Flags on September 11, 2014. The evolving tactics of human traffickers and behaviors of victims required updated guidance in order for financial institutions to better meet Bank Secrecy Act (BSA) obligations to assist the government in detecting and preventing money laundering. 

The Supplemental Advisory focuses on four emerging tactics used by human traffickers to carry out and hide the proceeds from their illicit operations: front companies, exploitative employment practices, funnel accounts, and alternative payment methods. Front companies are lawful, licensed, and registered businesses which are used by traffickers to comingle the illicit proceeds generated from their scheme of human exploitation with that of a legitimate business. Examples include massage parlors, nail salons, even electrician services, and faith-based mission work. 

Labor trafficking can be harder to detect than sex trafficking for AML departments. FinCEN’s Supplemental Advisory alerts financial institutions to examples of exploitative labor practices, including visa fraud, wage withholding, and recruitment fee advances. Note that in 2019, the Federal Acquisition Regulation: Combating Trafficking in Persons was amended to address prohibited recruitment fees and broadened contractor responsibility for violative recruitment fees in supply chains. 

Funnel accounts continue to be a common tactic wherein a trafficker coerces a victim to open one or more bank accounts in their own name, and then directs them to deposit, transfer, wire, and withdraw monies in amounts below a reporting threshold, for the benefit the trafficker or the enterprise. Because the accounts are often held exclusively in the victims’ names, the trafficker remains anonymous. 

Such account activity may lead to an Unusual Activity Report or Suspicious Activity Report but that would erroneously target the victim, not the perpetrator. Accounts may be closed by the financial institution, or at the direction of the trafficker, following overdraft or low balances, which can cause victims to incur bad credit status and prevent them from accessing financial services in the future. 

The Supplemental Advisory further alerts financial institutions to the prolific use of prepaid cards, virtual currencies, smartphone cash applications, and third-party payment processors to advertise their sex trafficking business and receive payment. 

Although the indicators list addended to the Supplemental Advisory is not significantly different than past iterations, it adds a set of case studies. Specific perpetrator and victim vignettes are effective in modernizing detection tools as they allow financial institutions to keep their pulse on real life examples relayed by law enforcement and survivor advocates. The Supplemental Advisory also reminds financial institutions that they are protected from liability for information sharing afforded under Section 314(b) of the USA Patriot Act. Traffickers often implicate multiple financial institutions and only through a wider lens and open communication can otherwise lawful-appearing activity be identified as suspicious.  

Finally, the Supplemental Advisory notes FinCEN’s Customer Due Diligence Rule, promulgated in 2018, which generally requires some financial institutions to identify beneficial owners of commercial customers. Under the Trafficking Victims Protection Act, “whoever knowingly benefits, financially or by receiving anything of value” may be subject to criminal and civil liability. Therefore, diligence and monitoring processes are to include potential third-party participants in an exploitive scheme.  

FinCEN’s advisory on human trafficking is timely. In the last few months, regulators have signaled increased attention on financial institution responses to human trafficking. This past summer, Deutsche Bank was fined $150M by The New York State Department of Financial Services (“NYDFS”) for compliance failures related to client Jeffrey Epstein, his sex trafficking enterprise and correspondent banks. In the Consent Order, NYDFS found the Deutsche Bank “conducted business in an unsafe and unsound manner [and] failed to maintain an effective and compliant anti-money laundering program.” This September, Westpac Bank was fined $920M USD by the Australian Transaction Reports and Analysis Centre (Australia’s financial intelligence, anti-money laundering and counter-terrorism regulator) for failures in AML reporting, record keeping and detection, including transfers indicative of child sex trafficking. This fine is the largest paid to an Australian regulator for violation of money laundering laws to date. Also in September, the United Kingdom announced that the U.K. Modern Slavery Act of 2015 will be strengthened to (i) allocate more funding to enforce its requirements and (ii) mandate that companies’ modern slavery statements cover certain topics ranging from due diligence to risk assessment. 

Increased regulatory focus on financial institution responses to human trafficking deserves attention.

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Can I Negotiate a Bad Credit Auto Loan?

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Yes, you can negotiate your deal on a bad credit car loan, though you may not have the same leverage as someone with a better credit score. Without the strength of a high credit score behind you, you may not be able to qualify for as low of an interest rate or monthly payment as you’re looking for. But a lot of things associated with an auto loan can be negotiated.

Preparing to Negotiate a Bad Credit Auto Loan

Before you go toe-to-toe with a dealer, make sure you know what kind of power you have in this arena. This means knowing your credit score and what’s on your credit reports. Without this information, you’re powerless to push back against a lender’s assessment of your credit situation.

Auto Credit Express Tip: Remember, you’re most likely going to be interacting with the special finance manager at a dealership, who talks to the lender on your behalf. The dealer isn’t responsible for the rates and terms you qualify for, and the lender can’t determine how much a dealership is willing to cut a deal.

The only way to know you deserve better terms than you’re being offered is to do your research. Find out what the average car loan looks like for people in similar situations. You don’t want to go into a dealer with unrealistic expectations.

  1. First, get your credit score and credit reports. Now is a great time to do this, because the three major credit bureaus – TransUnion, Experian, and Equifax – are offering U.S. consumers free weekly access to their credit reports. This deal only lasts until April 2021; you can request a copy of your reports by visiting www.annualcreditreport.com.
  2. Next, look online for some national averages on auto lending interest rates and see where you fall on the FICO credit scoring model. Knowing where you stand enables you to prepare for the next steps in your car loan: your budget.
  3. The final step to getting ready to negotiate on your auto loan is to plan your car buying budget. If you don’t know what you have to work with, or how to accurately calculate the out-the-door and overall costs of your auto loan, then you won’t have a leg to stand on when talking to a dealership.

What Are You Negotiating For?

Without a plan or a budget to refer to, you can’t have a goal to negotiate for. When it comes to a bad credit car loan, there’s no point in negotiating just because you can.

You should have a set goal in mind, whether it’s a target interest rate, a specific loan term, or a set monthly payment amount. Don’t give these things away to the dealer, though. Keeping your numbers close to the vest is what gives you the power to make a deal on your terms.

In order to get an auto loan deal you can live with, you have to know what you can afford. To find this out, you can do a few simple calculations that the lender does when determining if your budget can handle a car loan. This is your debt to income (DTI) ratio.

Your DTI ratio lets you know how much of your monthly finances are already being used by your existing monthly bills, including an auto loan and car insurance. If you’re using more than 45% to 50% of your monthly income, a lender may not be willing to add to that burden.

To see how much auto loan you could qualify for, and to find out if those monthly payments fit into your budget, you can check out our car loan and monthly payment calculators.

Know What You Can Negotiate

In order to negotiate on your bad credit auto loan, you have to know what you can and can’t change your lender’s mind on. Not everything on a car loan contract is negotiable.

Here’s a look at what you can have a crack at negotiating:

  • Can I Negotiate a Bad Credit Car Loan?Vehicle selling price – The first thing you should know you can negotiate on when it comes to an auto loan is the price of the car. The sticker price on a new vehicle typically lists the MSRP, or manufacturer suggested sale price, and may list a dealership price, too. You can ask for any price you want, but the dealer may not agree to honor it.
  • Your interest rate – Your APR is likely to be a bit higher than you’d like with bad credit, but you can always ask a dealership or lender if what they’re offering is the best rate you qualify for. Often it’s not, there’s no rule that says dealers have to offer you the lowest rate or best deal that you’re qualified for by a lender. With that said, you don’t have to accept a deal that stretches you too thin, either.
  • Your loan term – Shorter loan terms mean higher monthly payments, but stretching your loan too long means a higher overall cost. Being a payment shopper, only looking at the monthly payment and ignoring the overall loan cost, isn’t the place to be with poor credit.
  • Down payment amount – When you have credit challenges, you generally have to meet a down payment requirement set by your lender. However, it may not be set in stone. Depending on your other rates and terms, you may be able to negotiate the amount you need up front.
  • Your trade-in – If you’re using a trade-in to cover some of your down payment amount, you may be able to negotiate what you’re getting out of it. It also helps to know the value of your trade-in before you head to the dealership so you can have more leverage in negotiation.
  • Prepayment penalties – If you have to take on a longer term to get a more favorable monthly payment, you can save money in the long run by paying more on your loan whenever possible. Look over your contract carefully to make sure you aren’t penalized for this, or ask the lender to remove the clause if you are.
  • Optional features and equipment – Some features on the vehicle you’re choosing could be optional, and carry additional fees which can be negotiated on. Things like window tinting, fabric protection, and certain optional packages like wheel protection or cargo nets could be charges coming from the dealer. You don’t have to agree to these. This also goes for extended warranties and GAP insurance coverage.
  • Dealership documentation fees – A “doc fee” on any auto loan contract, which dealers charge for preparing your paperwork and talking to the lender on your behalf, is pretty standard, but the amount varies. There’s no reason to pay through the nose for this, and many states cap the amount you can be charged. Expect a minimum doc fee, but try to lower it as much as possible.

With all these things to haggle over, there are three main things that are non-negotiable when it comes to a car loan (which are set by the state, so there’s no getting around them):

  1. Taxes
  2. Title fees
  3. License fees

Ready to Negotiate Your Next Car Loan?

If you’ve tried negotiating on a bad credit auto loan in the past and were unsuccessful, don’t give up! Just because one dealership isn’t willing to work with you doesn’t mean that others aren’t.

Remember to keep your search for a car loan to a two-week window. If you apply for multiple loans of the same kind with different lenders within that time frame, you stop multiple hard credit inquiries from affecting your credit score.

Additionally, when you have bad credit and need an auto loan, it’s in your best interest to make sure you’re applying with a subprime lender at a special finance dealer. These lenders are able to help people in many tough credit situations, such as bad credit, no credit, and even bankruptcy.

Here at Auto Credit Express, we’ve cultivated a nationwide network of special finance dealerships, and we want to get you matched to one in your area! We’ll get right to work for you after you fill out our fast, free, and zero-obligation car loan request form.

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