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Are You a Credit Challenged Entrepreneur?

I receive lots of calls and emails from business owners who want money for their business. More than 75% of the owners I speak to are credit challenged. Despite this, most of these owners were expecting to get information about low interest rate loan products. The stark reality is there are virtually no low interest rate loan products on the market for credit challenged business owners - the risk is too huge. Low interest rate loans are mainly offered by traditional lenders. Most, if not all traditional banks will not loan money to companies and owners with: credit issues; short term capital needs; and, small loan needs. A rep from a traditional bank told me that although they advertise loans starting at $50K, they try to avoid these loan amounts because it costs as much to underwrite a $50k loan as it does a $500k one. These are a few of the reasons why I sought alternative lending partners. Yes, their interest rates are higher, however they offer more options for un-bankable borrowers. So, un-bankable (from a "traditional perspective") business owners who are seeking financing I advise them to think like analysts and weigh the benefits of access to capital versus cost of capital today.

Business owners who want better financing options - terms and rates, start with credit management. I review a lot of credit reports and the three credit issues I see most often include:

1. Thirty (30) days+ late payments on several accounts

Solution - As soon as you realize you have made a 30 day late payment or know you will, immediately call your creditor. Let’s face it, most of us know when we will make a late payment. Many business owners have cash flow challenges and simply don't have the money to pay a bill when it's due. However, if you know you will have the money within a reasonable period of time, again, call your creditor! Why it this important? If you haven't made too many late payments in the past, your creditor will probably work with you and either not report the late payment or instruct the credit bureau(s) to delete the late payment. We're discovering more and more if you wait too long to call your creditor to request deletion of a late payment, your chance of success will diminish.

2. Federal Tax Liens

Solution - You can get a tax lien removed from your credit report even if you have not paid the entire lien off. If you enter into an agreement to repay the entire lien through direct debits, you may qualify for the withdrawal of the Notice after just three payments. Here are the criteria you must meet under this scenario:

Owe $25,000 or less

Enter into a Direct Debit Installment Agreement in which you pay the tax lien in full within 60 months or before the statute of limitations expires, whichever is earlier (if you are currently in a regular installment agreement, you can convert it to a Direct Debit Installment Agreement).

You are in compliance with other IRS filing and payment requirements 

Have made three direct debit payments in a row, and 

Haven’t defaulted on your current or any past Direct Debit Installment Agreements.

Tax lien withdrawal doesn’t happen automatically. If you meet the above criteria, you must request a withdrawal from the IRS. You do so by completing and sending to the IRS Form 12277, Application for Withdrawal of Notice of Federal Tax Lien. If the IRS grants your request, it will record Form 109169(c) (Withdrawal of Filed Notice of Federal Tax Lien) with the county recording office and send you a copy.

3. Collection accounts

Many business owners I speak with are not sure if the debt is owed or even if it’s their account. I have read credit reports with debts as low as $25. I later found out after speaking with the business owner they didn’t follow-up with the debtor because: 1. they didn’t owe it and thought it would disappear, or, 2. they paid the creditor, so they didn’t follow-up. Both of these reasons for not following-up are HUGE mistakes!

Solution 1 - this is what I did.

When I received a letter from a debt collector, I immediately called (the same day) the collector and advised the cable bill (I had a balance with the old company) had been paid. What did I do next?:

I called the cable company who confirmed they received my payment.

I then called the collector back and advised the creditor received my payment. The collector advised that it will take two weeks for the creditor to update their system which will sync with their system.

I called the collector back after 2 ½ weeks. They confirmed their system shows a payment was received. I asked for the rep’s name and a confirmation number which they don’t use – only an account number which was on my letter.

Done – it took some time for me to do this. However, the time was worth it not to have a collection account reported on my credit report. After years of working in the credit management industry, I inherently don’t trust debt collectors nor creditors when it involves a scenario like this one.

Solution 2 - involves if you owe the collection account.

Decide if you will pay in full or settle, then contact the collector.

Ask the collection agency to delete the account off your credit report after payment. Ask the collector when the account will be deleted.

Know the target amount you want to pay, offer less, and plan to negotiate. Have the money on hand to send immediately after negotiating a deal.

Do not agree to pay more than you can afford.

Note: Good News - Fair Isaac Corp., has created FICO 9. Paid-off and settled medical collections under this scoring model will be ignored as long as the collection has a zero balance. Now, if your only major derogatory are unpaid medical debts your score may increase by 25 points. Under the previous FICO model, if you let an account go into collection, your credit score would take a hit for as long as that collection is on your credit report (seven years). Not so with the new version.

Credit bureaus have made the score available, however, lenders will determine when and if to use FICO 9. I’ve been told many lenders are using this model.

Although, medical collections will have a lower impact on your credit score, unfortunately, they will not be automatically deleted off your credit report. These collection accounts will still show on your credit report for seven years unless you’re pro-active with the collector reporting the account. Some lenders may still have concerns about those debts and can choose to give you less than favorable loan terms.

More Good News - The credit bureaus’ have implemented the National Consumer Assistance Plan. What is it? Medical debt collections won't be reported until after a 180-day "waiting period" to allow insurance payments to be applied. The credit bureaus will also remove from credit reports previously reported medical collections that have been or are being paid by insurance.

"Balancing your money is the key to having enough." Elizabeth Warren

If you are a credit challenged business owner, developing a plan in 2017 to improve your credit score should rise high to the top of your "to do" list.