The Six C’s of Credit
A strong relationship with your banker and knowing how credit decisions are made can improve your chances of getting a loan. Applying for a bank loan can be a frustrating and mystifying experience for small-business owners. Here’s a brief guide to what makes bankers tick and some tips to help you navigate their world.
The main concern bankers have is protecting their capital, money with which their depositors have entrusted them. Consequently, bankers are generally very conservative. Their first priority is to recoup the principal of the loan. Their next priority is to earn a reasonable rate of interest on the loan. And their third priority is that you prosper and open more accounts with them. Safety of principal is paramount. Bankers are not in the risk business.
Your job is to provide the banker with as many reasons to feel safe as you can. You start with a loan or financing proposal–a statement of what you need, why you need it, when you need it, and how you plan to repay it. The documentation should include a description of how much you need and what you’ll do with the loan, up-to-date balance sheets, cash-flow pro formas and projected income statements. All banks have forms to help you prepare these, but using your own business plan increases your credibility.
What do bankers look for when considering a financing proposal? The “Six C’s of Credit” provides a start.
The Six C’s of Credit
Character: Personal character is most important since all loans to small businesses are personal loans. The bank’s experience with you is critical. The judgment on the character of an individual is based on past performance. Personal credit histories as well as business credit histories will be reviewed.
Capacity: This is figured on the amount of debt load your business can support. The debt-to-net-worth ratio is often used to justify a credit decision. A highly leveraged business with a high debt/net worth ratio is perceived as less creditworthy than a company with low leverage. Here is where your business plan can make a difference. Suppose it shows that the loan will increase earnings and lead to a swift reduction in the debt/net worth ratio. Your chances of a positive answer would increase.
Conditions: Economic conditions, both regional and national, have a profound effect on credit decisions. If the bank is persuaded that a depression is coming, it won’t extend credit easily.
Collateral: Collateral is a secondary source of loan repayment. They want the loan repaid from operating profits and inventory so you become a bigger, better borrower and depositor.
Credibility: Do you know your business? Can you be counted on to be level-headed? How credible are your plans? A business plan helps you answer the banker’s questions without hesitation, sending your credibility rating soaring.
Contingency plan: A contingency plan is a useful financing tool. Bankers like to see that you look ahead. A contingency plan proves forethought. A contingency plan is a short worst-case business plan that examines the options that would be open to the business and how those options would be treated. Decisions made in panic are poor decisions. A contingency plan avoids panic.
Follow the Six C’s and you’ll be on your way to a prosperous business and protection for your future.
In December 2004, the world’s five leading payment card brands – American Express, Discover Financial Services, JCB, MasterCard and Visa – collaborated to create a worldwide standard for protecting consumer cardholder data. Most recently updated in August 2009, the Payment Card Industry (PCI) Data Security Standard (DSS), is a compilation of best practices for securing data throughout the information lifecycle.
The guidelines of the PCIDSS are thorough, however since its initiation, there have been loopholes in the application and enforcement of the standards.
The problem? High-volume businesses (particularly online businesses) must have their compliance assessed by an independent assessor known as a Qualified Security Assessor (QSA), however companies handling smaller volumes have the option of self-certification via a Self-Assessment Questionnaire (SAQ). This is where the problem comes into play. We have all filled out balloon answer sheets at some point in our lives and know how easy it is to check off all the right answers without thinking twice about the repercussions. “I am a small business owner. I have way too much on my hands to do this procedure every day. I will just do it once a week instead.” Sound familiar?
Well, think twice. If you get caught, even without having your system hacked and information stolen, you could be facing hundreds of thousands of dollars in non-compliance fines-easily enough to put most of us small-business owners far underground.
The PCIDSS requirements are simple if approached systematically. They are outlined below:
- Install and maintain a firewall configuration to protect cardholder data
- Do not use vendor-supplied defaults for system passwords and other security parameters
- Protect stored cardholder data
- Encrypt transmission of cardholder data across open, public networks
- Use and regularly update anti-virus software on all systems commonly affected by malware
- Develop and maintain secure systems and applications
- Restrict access to cardholder data by business need-to-know
- Assign a unique ID to each person with computer access
- Restrict physical access to cardholder data
- Track and monitor all access to network resources and cardholder data
- Regularly test security systems and processes
- Maintain a policy that addresses information security
Unfortunately, there are many small business owners that either feel that the above twelve standards are too complicated to implement, or that they are somehow a special exception and the rules don’t apply. Wake up call! These rules DO apply to any business or organization, for-profit or non-profit, that accepts credit or debit card payments.
Look at it this way: Any successful business makes its customers a priority. The PCIDSS guidelines are just another step in keeping your customers safe and happy, and are the very minimum you should be doing in that regard. Every time a customer hands you a credit or debit card, they are trusting that you will process their information safely.
If properly maintaining the twelve PCIDSS guidelines seems like an unmanageable task, you should consider using a third-party payment service. Especially when it comes to online transactions, customers are always more comfortable going through services such as PayPal and Authorize.net. It is really a win-win situation, as these companies deal with all the credit card information and simply post a deposit to your account.
Eric Smith, a Chase costumer, was crippled by a high interest rate that was eating up his monthly payments with finance charges. So he decided to apply the patented executive customer service technique, and managed to bring his APR down to 9% from 26% as well as getting 3 months of fees refunded. Mr. Smith, a recent college graduate, was just starting his career, and found that he was barely able to make his minimum payments each month. So, he did what any good customer would do and contacted Chase to ask if there was anything they could do. After spending an hour on the phone with Chase customer service, he was denied any information or help.
Having previously run across the topic of executive customer service, Eric jumped online and found the executive contact information for Chase. He then sent an email, and received a call back from a service rep within days. The service rep patiently discussed the matter with Eric and then informed him that he would receive a call back within an hour. Sure enough, 50 minutes later the phone rang, and the rep informed Mr. Smith that his APR was to be frozen at 9% for 12 months, and that 3 months of fees would be credited to his account. Needless to say, Eric went from being constantly stressed by the weight of unsurpassable credit debt to a very satisfied Chase customer in just a matter of minutes. But why is it that more people don’t experience this same customer satisfaction on a regular basis? This is due to the nature of executive customer service. Executive customer service is of group of high-powered problem solvers that are attached to the executive office of most major corporations. Their contact information is never publicly posted but escalating to them can get some of the most intractable problems resolved.
Many of us have been impacted by the current economic crisis by having our credit card limits cut. This is especially alarming to those who never make late payments and do not have negative items on their credit reports. A number of Credit Card Builder clients with perfect credit have experienced this.
Recently, Jon, a college student, went through this situation with his AMEX card. In May, Jon had a $3,200 credit limit and had his limit slashed to $1,000. For Jon, this was unacceptable! Anticipating the effect this could have on his credit report, Jon proceeded to call and speak with AMEX customer support. He was connected to their “support team” overseas and eventually to a CSR. After receiving arbitrary excuses as to why his limit was cut (none of which were pertinent to his situation), he became frustrated with their lack of sound reasoning and decided to escalate the situation.
Jon called two days later and spoke with another CSR and asked to be connected to a manager. The manager proceeded to tell him that he was “ineligible” to even protest the situation! This angered Jon to such a degree that he hung up the phone and decided to do some homework. After a few searches online, Jon found contact information for AMEX’s executive office. He called and was connected to a gentleman who told him that his credit was certainly worthy of having the decision reviewed. The next business day Jon received a call from the executive’s office letting him know that his AMEX account had been fully reinstated to its original limit of $3,200!
The moral of this story is that persistence pays off. Many Credit Cards Builders clients find it unusual that Credit Card Builders requests a client to call in multiple times to a lender in order to accomplish a specific task, e.g., changing the terms of a credit card, merging together two accounts, etc. But clearly these large companies do not have consistent guidelines, and many times with persistence you can take advantage of this to accomplish your goals.
For those interested in getting their AMEX cards reinstated, see below for links with contact information for AMEXexecutives.
Congressional legislation (in the form of the CARD act) passed two years ago aided in keeping the credit card companies somewhat in check when it came to assessing fees and penalties.
Today, however, banks are gradually beginning to implement a new set of charges their credit card customers have already begun feeling; and others that will have negative consequences in the very near future.
For example, at one point the Bank of America began notifying select customers they will be assessed a $59 annual fee. Why some of their customers, and not all of them? The answer lies in the amount of risk each of their customer presents.
Those who are being charged include those whose balances are at or near their maximum credit limit; those whose FICO scores are low; and those who have no other accounts or investments with the bank in question.
Bank of America also added penalty interest rates of as much as 29.99 percent to the balances of customers who do not make payments on time. Bank of America officials explain that each case will be judged differently and not everyone who makes a late payment will be assessed this high rate.
This article is not meant to single out Bank of America. In fact, other financial institutions have been assessing penalty interest rates for years, but because Bank of America is one of the nation’s largest banks, its change in penalties will affect many others.
There are other ways in which banks are attempting to recoup money include discontinuing debit card rewards programs, charging fees for checking accounts and instituting a fee for using an ATM.
The same financial institutions that got billions in bailout money are now holding their cardholders – the very ones who provided the bailout money – to a higher standard. It makes one wonder when it all will end.
Private money lending has the potential to be lucrative for investors who are anxious to reap a high return with relatively low risk. Private money loans, more commonly known as hard money loans, are used by businesses and individuals who are in need of fast capital. People who choose to become hard money lenders typically fund more high risk companies, which are otherwise often rejected by various banks. However, private money lenders are able to charge a much higher interest rate, primarily because they are among the borrower’s only options for obtaining fast capital.
Private money lenders also provide businesses and/or individuals with short term loans, which are commonly referred to as bridge loans. The interest rates on bridge loans are usually between 11 and 13 percent for real estate hard money loans, which is considerably higher than the average bank. As a general rule, hard money loans are property driven, which means a relatively quick turnaround. This can be very beneficial for the investor because not only is the investor able to charge a higher interest rate, they typically don’t have to wait long to reap the financial return.
Private money loans are beneficial not only to the investor, but also to the business that is borrowing the money. In the absence of private money lenders, businesses that don’t have established credit, or have poor credit, would have no way to obtain the funds necessary to proceed with their project. In addition, businesses are able to get the funds much faster than if they were waiting for a bank to process and then close on the loan.
However, potential private lenders need to make sure to use caution and good judgment before extending a loan to a business or individual. This can be done through careful research. If the company has a history of problems, it would be a good idea to personally meet with them, which gives them the opportunity to explain any mistakes. Also, investors should make certain that there is a solid business plan in place, which includes a specific strategy addressing how the funds will be paid back. Even though private money lenders have the opportunity to gain a significant return on their investment, they still need to be discerning about distributing the funds.
In general, private money lenders distribute funds when one of several criteria is present. First, when the amount of the loan is $500,000 to $20,000,000 per transaction on the same project. Second, when there is up to 75 percent loan-to-value (LTV) on improved structures and up to 55 percent LTV on raw land. Third, when it is a commercial property purchase, construction or refinancing. Fourth, when bank workouts, bankruptcies, and foreclosures are common. Finally, when there are loans on commercial buildings or vacant land.
Another advantage to becoming involved in private money lending is that generally speaking, the LTV ratio is relatively low, which means that there is a greater opportunity for reward even though there is less of a risk. The LTV ratio of a property is the percentage of the property’s value that has been mortgaged. The LTV can be found by dividing the mortgage amount of a property by the lesser of either the appraised value or the selling price. For example, if a home is appraised for $300,000 and there is a $240,000 mortgage on the property, then the loan to value ratio is .80, or 80 percent.
For private money lenders, the lower the LTV, the better. Lenders typically see loans with high LTVs as more risky than those that present significant down payments or have larger amounts of equity. The reasoning is that borrowers who have less money invested in a property have less to lose by defaulting on a loan than a person who has put down a large down payment or has a good deal of equity in a property. For those who choose to become private lenders, decisions must be made about the LTV that will be required from potential borrowers. Becoming a private money lender is a potentially lucrative endeavor (one with low risk and high reward) as long as you do your research. When you are prepared and know specifically what the terms of your loan will be, you are going to be in a much better position.
“Credit Card Builders” is known as the best way to get $50,000 to $250,000 money as loan. In the video, Ari Page, partner in the Credit Card Builders, is receiving the Best Credit Card building company.