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Business Financing eXpert
Archive for the 'Personal Credit' Category
Does A Car Lease Affect My Credit?
September 12th, 2008
Here’s a question from a reader:
Does signing a car lease and making those payments impact personal credit in any way? The short answer is, “It may.”
If the car lease is a personal lease, and is reported to the credit reporting agencies (most are, but not all), it will affect your credit. Whether it helps or hurts depends on all the other information in your credit report. If you already have a lot of debt and payments, then it could be negative. If not, it may be a positive.
Even if the lease doesn’t impact your score much, it can affect your credit in other ways. I recall one entrepreneur, for example, who was charged a higher rate for her mortgage due to an expensive car lease payment that appeared on her credit report. Except it wasn’t hers. When she got it removed, her interest rate improved.
If the vehicle is leased under a business lease, and does not appear on your credit report, then it will not affect your personal credit.
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Does A Car Lease Affect My Credit?
September 12th, 2008
Here’s a question from a reader:
Does signing a car lease and making those payments impact personal credit in any way? The short answer is, “It may.”
If the car lease is a personal lease, and is reported to the credit reporting agencies (most are, but not all), it will affect your credit. Whether it helps or hurts depends on all the other information in your credit report. If you already have a lot of debt and payments, then it could be negative. If not, it may be a positive.
Even if the lease doesn’t impact your score much, it can affect your credit in other ways. I recall one entrepreneur, for example, who was charged a higher rate for her mortgage due to an expensive car lease payment that appeared on her credit report. Except it wasn’t hers. When she got it removed, her interest rate improved.
If the vehicle is leased under a business lease, and does not appear on your credit report, then it will not affect your personal credit.
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In Credit Crunch, Business Comes First
September 8th, 2008
Business owners are electing to pay business debts at the expense of personal debts, reports Experian(tm). In a comprehensive study covering 2.7 million business owners over the course of a year, the global information services company found that found that business owners with a severe mortgage delinquency were more likely to pay their business obligations instead of their mortgage.
Experian’s research showed that because of deteriorating equity, high mortgage payments and limited refinancing options, business owners chose to ensure the business’ survival, preserving their source of income at the risk of losing their home. That’s the bad news.
Here’s the good news:
Business owners were less likely to experience a 90+ day delinquency on their mortgage than other consumers. In fact, by April 2008, the average home owner was 1.5 times more likely to experience severe mortgage delinquency than the average business owner
Additionally, Experian’s study found that small-business owners are relying on commercial lending options more often than personal financing options, to support their businesses. We think that’s smart business and it may very well allow the business owner to keep their business even if they have to start over personally.
But of course, the downside is that business owners’ personal credit can impact their business financing. Experian, which sells a credit score that blends the business owner’s credit with the credit of the business, points out that consumer scores work great for assessing consumer risk, but their blended score performs nearly twice as well as a consumer score for assessing business risk.
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Credit Investors: Partnering For Personal Credit
July 18th, 2008
Like it or not, your personal credit will open or shut doors for financing your business. If you have terrible personal credit, we can help you obtain trade credit, credit cards, equipment leasing and potentially some bank financing. However, we can obtain much more financing, if a business owner has great credit (preferably 700+ FICO). This has important consequences for you, if you are trying to finance a business and have poor personal credit. You need to consider bringing on a credit investor or partner that can help you obtain bank financing for your business.
Last week, I asked an entrepreneur about his loan readiness and he told me his credit was in the toilet. So I turned to his partner, “My credit is even worse,” was his reply. I guess when it came to selecting partners, this criteria slipped their minds – don’t make the same mistake. Unless a partner brings irreplaceable technical expertise, they can always be replaced with someone that brings skills and credit to the table.
If you’re an entrepreneur with poor personal credit, you should consider bringing on a credit investor or partner. Ideally, you’ll need someone with 700+ FICO scores and good ratios (feel free to ask one of our consultants to do an analysis of a potential partner before you tie the knot). You may have better luck finding an investor or partner with good credit, than finding one with cash.
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What Does a Personal Guarantee Mean?
May 26th, 2008
Sometimes when you are close to a subject it’s easy to forget that what is obvious to you may not be so obvious to someone outside the industry.
Case in point: personal guarantees.
For most people the meaning of the term “personal guarantee” is pretty obvious – you agree to personally be responsible for the repayment of the loan. It is usually used in a business sense: a business owner who signs a personal guarantee for a business loan is agreeing to be personally responsible for the loan if the business does not repay it. The term is not usually used in the context of personal loans because when you sign the note for the loan you are implicitly providing your personal guarantee. But it’s there.
We were pretty surprised and confused, then, when Entrepreneur recently published an article that muddied the waters. In “Nothing Personal: How can you protect yourself and your assets from risk when securing a business loan?” author Rosalind Resnick replied to a reader who was asking about how to find non-recourse loans that do not require the borrower’s personal guarantee.
The first part of her answer was fine, although I may have started out by explaining the difference between non-recourse loans and personal guarantees to make sure the reader understood what those terms mean. (A non-recourse loan is typically a secured loan in which the collateral can be repossessed, but the borrower is not personally liable if he or she defaults.)
However the second part of the article was just, well, wrong. There, the author described Prosper as an example of a service that facilitates loans that “don’t require personal guarantees.” Huh? Take a look at the sample promissory note provided on the Prosper website. A borrower is most certainly agreeing to guarantee repayment personally. (You wouldn’t get too many lenders if the loans didn’t carry a personal guarantee.) And Prosper reports all loans on borrower’s personal credit reports (not just loans with late payments as the article implies). How could they report to the loans on the borrower’s personal credit if the borrower wasn’t personally guaranteeing the loan?
Here’s where it gets bizarre.
My colleague Luke Adams, who has been both a Prosper borrower and lender, pointed out the error to Entrepreneur magazine, which then contacted Prosper. In an email exchange between the editor and Prosper, the Prosper representative told Entrepreneur that the loan did not require a personal guarantee because no collateral was involved.
Again, terms that seem obvious are getting mixed up here. Whether a loan is secured (collateral) versus unsecured (no collateral) has nothing to do with a personal guarantee. While I couldn’t find a formal definition of personal guarantee on the SBA website (I guess they assume everyone knows what it means, too), I did find this reference which clearly distinguishes between personal guarantees and collateral as separate and distinct loan terms.
Don’t get me wrong. I love reading Entrepreneur magazine and I won’t cancel my subscription over this. I also think Prosper is one of the best innovations in lending I’ve seen in my 20-year career in consumer credit education. (Though my fingers are crossed that they will develop a true business loan option.)
But in the meantime, if you are looking for a business loan with no personal guarantee, make sure you’re getting the right advice.
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