A: The customer had told us when we first talked that he thought his credit score was well over 700, and when we ran it, it came in at a 590.
A: Sure, we have a lot of customers who overestimate their credit score, but the reason this one stood out is they had all of the signs of a solid transaction – lots of credit depth, they were homeowners (actually owed two houses), had lots of cash flow, and just in general paid their bills on time.
A: The credit scoring models are finnicky at times. Often, a late payment on something right now can negate years of positive pay history. In this case, a bank error led to their payment being applied to the wrong account, and they were reporting 30 days late on two separate auto loans with the same institution. The only thing worse than being recently late is being currently late.
So, you have a customer who always pays his bills on time and for years has considered himself a 700+ credit guy reporting over 100 points lower than his norm. It was a big shocker.
A: Well, unfortunately, credit score is something we can’t look past completely. It’s always a factor. Thankfully, however, we have built a business on helping customers with non-traditional profiles. While we can’t outsmart their credit score, we can look at other factors to get around credit issues – especially when they don’t really represent the character of our applicant.
A: For starters, when we looked at their business credit history it was nearly flawless. This helped show that the late payments were incidental and not indicative of the quality of the customer. Then, we set the customer up with a small security deposit to help overcome any worries about risk or short-term cash flow. Lastly, we had them show proof they were current on the accounts now. Their bank even provided a letter promising to update their payment history. In the end, even though the credit score said 590 – we were able to show that our customer was a 700 guy.
A: Customers should always be acutely aware of their credit history – it’s way more important than just monitoring their score. Most consumer-driven scoring models like the ones offered for free across the web are NOT FICO scores, so they are not the same ones we as lenders use to evaluate credit. The big surprise isn’t that we might see a lower score than you do – it’s that the customer may not realize something is reporting late (whether correctly or incorrectly). Using a good monitoring service and accessing a credit report about four times a year helps safeguard against mistakes.
A: The Federal Trade Commission ran a study a few years ago that demonstrated 21% of customers had a mistake on their credit report. That’s about 40 million Americans, and what’s more, customers who apply for credit more than twice a year are about three times more likely to have a material error on their report. We find that business owners are much more active with their personal credit and tend to fall in that category more often than not.
A: He was able to get his new tow truck, and all is well. As much as I’m proud we were able to work with him, his willingness to work with us on putting a structure together that made sense for the underwriters was the most important ingredient in our successful outcome.
Next week we will check in with George Vandel in our Sioux Falls office. Stay up to date and learn more from our valuable resources at www.AmericanEFS.com/The-Bottom-Line
As a company that has been offering financing on dump trucks and trailers for nearly thirty years, we’ve seen every possible credit profile. Ironically, the customers with personal credit issues have often been our best paying and longest tenured partners. Because of that, we have a passion for helping all credit types. Having an in-house finance program allows us to make loans for customers and ignore credit challenges when we know they have a thriving business, but how is it that we successfully place hundreds of dump truck loans per year even with outside lenders?
Over time, we’ve developed a tried and true method to getting bad credit, thin credit, and even no credit customers into dump truck loans and leases. This involves a simple five step approach that we train all of our representatives to follow:
Prior to submitting your transaction, we ensure that all of your credit obligations show current. That means if you’re late on a car payment or have a small open collection, we’d rather guide you to bring your accounts to a positive status BEFORE submitting your application to a lender. It’s not that we can’t get rolling stock financing approved with some minor credit issues, but by being proactive we improve the character profile of your application and improve the odds that you’ll score favorably whether we look at your transaction in-house or syndicate with one our outside construction lenders.
After addressing minor credit issues, the next biggest priority is coming up with an alternative structure to entice a lender to offer an approval. The best ways to do this include pledging a second dump truck, trailer, or other titled vehicle as additional collateral; providing a large (15% or more) down payment; being willing to accept a shorter term (like 24-36 months); and having a good credit additional signer willing to guarantee the transaction. To really sweeten the deal, having two or even three kinds of structure can make a finance company turn a blind eye to some credit hiccups, and can even result in a better rate or terms — even if you have less than perfect credit.
One common joke in the equipment leasing business is, “If I only had a truck…” The punchline is that owning a dump truck, or excavator, or dozer will automatically bring work, and that work will yield the money needed to make the monthly payment. The reality is that just because you buy equipment, you may not necessarily find a massive influx of revenue. Lenders know this all too well, for even some businesses with amazing work in progress and massive cash flows have gone by the wayside during slow times.
If you can provide some kind of proof that you have work in the pipeline – a letter of intent from a contractor that plans to hire you, a trucking company that will lease your unit on, or proof that maintenance on a dump truck that needs replacing is impacting your ability to do outstanding work now – the funding source will give some credence to future revenues. In general, the rule of thumb is that credit decisions are made based on what you earn now – not potential income – but lenders are also human beings with common sense and can connect the dots. If you help them see how you get from point A (buying the truck) to point B (actually making money hauling), you’ll score legitimate bonus points in the process.
We don’t mean this literally, but giving your representative an idea of your background and body of experience in construction and trucking, including how long you’ve had your CDL, and what kinds of work you’ve done in the past can always help. This is especially true for customers with limited time in business. You may not have a track record of success under your current business name, but you can show that you’ve had personal successes in the industry. If you really want to stand out, provide work references who can vouch for your level of service and commitment. All of these things help to address any potential character concerns that pop up when they see derogatory credit marks.
If you have poor credit (below 600), there’s always wisdom in finding a less expensive truck or trailer, or buying one instead of multiple units. You’d be surprised how frequently we have customers contact us to buy $150,000 dump trucks with a 500 credit score. In fact, for applicants in the poor and fair credit sphere, nearly 90% end up lowering their expectations and buying something less expensive, older, or in a smaller quantity than they initially anticipated. Don’t let this discourage you. Buying a truck that can immediately generate a return on investment gives you an opportunity to use increased profits to repair credit issues and results in you showing more cash flow. All of that ultimately means that when you next apply for financing, you will have better odds of qualifying for a more expensive hauler.
All of the above steps are ways to minimize the damage of negative credit. In truth, nothing can fully replace a track record of paying your bills on time. Customers with bad credit seeking dump truck loans will typically have to pay larger financing charges. Nonetheless, these contracts build commercial credit ratings and references that can be powerful ammunition in obtaining better rates, longer terms, and lower or even no down payment financing in the future.
Getting the best deal on financing for a dump truck, trailer, pup, transfer, articulated hauler, or other construction vehcile doesn’t have to be rocket science, but it does require thinking outside the box. Instead of focusing in on the best interest rate programs, customers should consider return on investment, and make moves to improve their future credit outlook. By knowing how to present the best package to a lender, you’ll already be a step ahead of the pack.
We received a transaction from a broker the other day. At first, we dismissed it immediately because the owners had a recent bankruptcy and their house was about to go into foreclosure. The request was for a used SUV costing $35,000. The customer was in a rural area and wanted to use the SUV as an upscale transport vehicle to expand a taxi/limo service they started three years ago.
Initially, it was an easy decision to pass on the transaction. It didn’t fit our standard credit criteria, nor would it fit any of our lending partners. What made us second guess our instincts, however, was the fact that the customer had a good website (signifying a stable and successful operation) and showed evidence of enough cash-flow to service the debt. Moreover, their business model seemed appropriate for the area: one that caters to both winter and summer recreation. After taking a closer look at the transaction, we decided it would be worth further investigation, and received permission from the Broker to interview their client.
We had a frank and honest conversation with the client in which we discussed, among other things, their plans for using and making money with this new acquisition. The customer had done his homework, but had unrealistic expectations when it came to financing. Although the company had adequate cash-flow, with the assets they had in place, this particular item needed to come with an $800.00 a month payment. The problem is a matter of term. Not many lenders want to become the new “largest creditor” for a borrower just out of bankruptcy. Recognizing the wisdom in that principle, we had in our minds the possibility of a 36 month term with additional collateral in the form of some older titled vehicles that were offered as security.
The customer knew how much they could afford, and we agreed. In a good month the vehicle would generate about $3,000 a month in gross revenue. After factoring in the cost of insurance, taxes, fuel, maintenance, and drivers, the monthly payment need to be no higher than $800.00 if they were to make a profit. We agreed to fund the transaction for up to $25,000.00, albeit at a longer term than we originally envisioned, so as to ensure a payment well within the customer’s predetermined budget.
Where many finance companies specialize in pushing a high monthly payment on customers, our strategy has always been to ensure the payment provides the customer with an opportunity to be profitable while using the equipment. The benefit to this strategy, for us, has been a stable and well-performing portfolio: not only do our customers not sign up for payments beyond their means, but we also get the comfort of knowing the payment is reasonable within the confines of their cash flow.
In short, selling a customer a high payment does us no good, it merely increases the risk of default and prevents the customer from making money when the equipment is at its most productive. By paying close attention to how the term can make or break the deal, we’ve been able to mitigate the risks to ourselves and to our customers. For us, that’s just one more piece of the American Leasing Advantage.
Rate shopping is an important part of seeking out financing. Understanding how much borrowing money is going to cost in both the short and long-term is key to making an intelligent, business-minded decision. Unfortunately, shopping for financing isn’t always about finding the best terms or rate. In some cases, people will shop for any possible lender who can get a deal done. Usually, these types of desperate measures were reserved for those who probably couldn’t get approved anywhere anyway, but recently a new form of this ‘shotgun’ approach has emerged.
Customers appreciate the ability to go to one place and get everything done. In a perfect world, a customer could go to their vendor to pick out the equipment, then get financed and funded, and make payments directly to their vendor as well. In the real world, it happens more like this:
1) Vendor takes a credit application
2) Vendor sends an application to their preferred lenders
3) If declined, vendor sends to alternative financing options
4) As a last ditch effort, the vendor might refer the customer to a brokerage house.
The problem with this scenario is, that many vendors are submitting transactions to multiple brokers rather than simply sending directly to funding sources. That is not to say that there aren’t good brokers. If there’s one thing I’ve learned from this business, it’s that there truly are professional brokers out there who know the business inside and out and can help their customers. The problem is that many brokers utilize the same funding sources. To understand why this is a problem, picture being on the other side of the equation.
Imagine that you are a loan officer at a bank, working in a department specializing in equipment financing. On a given day, you see a variety of applications, but on this day in particular you get bombarded by three different brokers with three different stories but the same applicant and roughly the same equipment. Each broker, when notified about the multiple submissions, is oblivious to the other brokers also working the deal. What’s more troubling is that the vendor is the person who submitted the deal to multiple brokers. Each broker then, in the course of trying to get the applicant approved, has submitted the customer to three or four funding sources a piece before converging at the same funding source before the loan officer now looking through the file.
This is a real scenario we encountered just the other day. Upon further investigation, it was discovered that the customer wasn’t even aware that as many as ten or eleven different lenders had reviewed their information. The moral of the story: customers need to ask more questions about where vendors and brokers are sending their applications. Utilizing the aforementioned ‘shotgun’ approach might expose the deal to more chances for approval, but it also raises red flags with a lot of lenders. For starters, it creates the impression that the customer is seeking out a lot of equipment at once. Because brokers package submissions differently, a more generic submission or a disparity in price could be incorrectly characterized as an additional ‘split’ transaction. Moreover, this strategy creates some doubt as to the credibility of the transaction and causes the lender to weigh statements from all of the brokers in making their decision, which can lead to an applicant being portrayed in an unfavorable light.
Lenders must have a permissible purpose to access a customer’s credit report per the Fair Credit Reporting Act. Most vendors and brokers use language in their credit release (next to the signature lines on the application) allowing this permission to be ‘assigned’ to the agents of the broker. Thus, when a customer signs a single application, their credit can be accessed by anyone who gets the application third hand and has the permission of the original party the customer applied with. The best way to prevent this from happening to require the vendor or brokerage to state in writing who they are submitting each transaction to. Don’t leave it up to them to simply ‘find a place that will approve you.’ Rather, take charge and ask to be involved in the process. Otherwise, you could be dealing with some red flags that will take a while to come down.
Consumers are more conscious of their finances than ever before. Want to see the evidence? Just turn on your television and watch the array of credit report and score products being advertised on commercials while you’re watching your favorite primetime shows. Little do many people realize, however, that ‘Freecreditreport.com,’ ‘Creditchecktotal.com,’ ‘Freecreditscore.com,’ ‘Truecredit.com,’ and many of the other well-known consumer credit report and score services are actually owned by the major credit bureaus themselves.
Most people don’t see a problem with this scenario. After all, Equifax, Experian, and TransUnion are the best repositories for consumer credit information–which means the information they supply is necessarily accurate, right? The fact is, that’s only partially true. While we at American Leasing & Financial will always advocate that customers view their credit reports frequently and stay on top of their information, we’ve begun to notice a concerning pattern that seems to be impacting a lot of consumers in a negative way.
Consumer credit scores are a dime a dozen. That is to say, there are no less than thirty major credit scoring models being pawned off as ‘your credit score.’ There are a variety of ways to ‘score’ a credit report, but the number most consumers see when they make buy their credit score from the major credit bureaus is almost never the same number we see as lenders on the other side of a financial transaction. One of the most common scores consumers buy is their ‘Plus’ score, a score originally created by Experian themselves. The Plus score, for all intents and purposes, is supposed to do the same thing as the FICO score: it measures a consumer’s creditworthiness. Unfortunately, it does so in some very different ways.
For starters, the Plus model ranges from 330 to 830 (as opposed to the 300 to 850 range espoused by the scores we use.) In addition, the mission statement of the Plus score is mostly educational in nature. Experian’s executives call this being ‘consumer focused.’ The reality is that by using a different scale and placing different weights on categories, consumer’s get a skewed (at best) view of their credit score. The Plus score has often been the culprit when customers call and tell us they have a 680 credit score, and we pull their credit only to find a 560.
Still other scoring models like the VantageScore model go all the way up to 990. Suddenly, a 700 credit score doesn’t sound so good, does it? We are constantly trying to educate consumers on the basics of credit scoring. Most lenders, even those in the commercial finance business (like ourselves) utilize FICO scoring models, created by a company called Fair Issac Corporation. Thus, to guarantee you’re looking at a score as close as possible to what a potential lender might see, you should only pay for a FICO score. FICO scores are available for purchase here. Recently, a new amendment to the Dodd-Frank legislation that passed last year has made it the law that any lender that denies a consumer for credit or charges a higher-than-normal interest rate is required by law to provide that consumer with their FICO score. You can read more about that in this article.
To learn more about the factors that impact your credit score, check out our free e-book.
One of the most common misconceptions with respect to credit scoring is the idea that one’s credit score is an indicator of how well they pay their bills on time. Sure, that’s part of it, but credit scoring algorithms are substantially more nuanced than people are led to believe. I can’t tell you how many times I’ve had an applicant vehemently swear that they should have a near perfect credit score, only to see the credit score come back in the mid 650’s. The reason has less to do with people not managing their credit as well as they think they are, and more to do with how truly detached the modern consumer is with the formula that determines what their credit score actually is.
For example, many people carry a small balance on their cards each month due to the longstanding belief that carrying a small balance is better than carrying no balance. The truth is, even if they’re small balances, most credit scoring formulas (including the widely popular Fair Issac–or FICO–models) penalize a consumer for having too many accounts with a balance. In the same way, sometimes people pay their cards in full each month but do so after the statement closing date, so that a group of credit cards which actually have no balance report as though they do have a balance each month.
Another issue I run into frequently is that there is often a disparity in credit between husband and wife. The fact is, the Fair Credit Reporting Act has guaranteed that accounts in which an individual is designated an ‘Authorized User’ are still to be scored just as they are for the primary accountholder. Many individuals don’t realize that by simply adding their spouse to their existing credit card accounts, they can pad their spouse’s file and close any gap between their credit scores.
A basic rundown of the most commonly used lender score formulas is as follows:
– Payment History – (35%)
– Utilization/Capacity/Balances Owed – (30%)
– Length of Credit History – (15%)
– Types of Credit – (10%)
– New Credit – (10%)
What makes all of this interesting is that because of the respective weights assigned to different categories, there are people who have had late payments in the last few years with credit scores higher than those who pay all of their bills on time always. Because personal credit is key to strengthening your ability to personally guarantee a transaction, we believe it’s important to educate our consumers on credit matters. For more information, please check out our free guide to Understanding Your Credit Score here.
When companies providing commercial equipment financing—in the form of leases or finance agreements—say that the landscape of lending to businesses has changed over the past five years, it’s not just talk. Business owners who haven’t sought funding for a business purpose for quite some time often find themselves bewildered at the array of requirements to attain an application approval in today’s world. What comes as perhaps the biggest surprise is that most banks and financial institutions require a personal guarantee—even when the contract is drawn up in the name of a business.
Just yesterday I found myself talking to an applicant who had a serious tax lien (think five figures) on his personal credit. The lien, he explained, was the product of confusion over how much rental income he had earned over the past few years. Unfortunately, a tax lien that serious presents a problem for lenders in our marketplace. After I gave him an explanation on why we probably wouldn’t be able to do the transaction, his wife called in to our office. She explained politely, but firmly that the tax lien should have no bearing on whether or not we approve their application. In her mind, a personal financial matter shouldn’t hold back a business which, on paper at least, appeared to be performing fairly well.
Her rationale makes logical sense, except that funding transactions in a post-recession (or present recession depending on what you believe) economy requires protecting interest in not only the business, but the individuals guaranteeing the business. A tax lien might not mean there is a garnishment on wages or a freeze on assets, but it could spell the beginning of a process that eventually leads to those things. Moreover, a company like ours is simply not able to accept a diluted personal guarantee, knowing there is a risk that adverse action by a party higher on the totem pole might lead to a default scenario.
The best way to handle a tax lien is to make arrangements with the IRS or State government responsible for its placement. Often times, a payment plan can eventually lead to a lien release. Simply not resolving a lien, contrarily, can haunt you in your financial dealings for decades. Being proactive just might salvage your ability to attain financing even if a lien has already been filed. You can find more information on how to handle receiving a Notice of Federal Tax Lien here.
