Dimension Funding, LLC

FICO Scores are Overrated

2010-01-21T12:08:00.001-08:00

So, you have a great FICO score and are ready to start flaunting it to lenders. You sit back and prepare to be entertained as they drool and stampede one another just for a chance to loan you money that you will assuredly pay back.

NOT SO FAST!

Have you taken the time to look at what is in your credit report? In today's credit environment, your FICO score has become almost insignificant. The days of loose money and automatic underwriting are over. Instead of a computer program judging your merits on this single factor called a FICO score, you now have a living breathing underwriter looking over your credit report line-by-line to spot any potential weaknesses in your credit profile.

Why have we moved away from the high-tech underwriting software and toward old fashioned manual underwriting? Because it turned out that the software programs were using overly optimistic models in their evaluations and as a result, the portfolios of lenders using these garbage models grossly underperformed. In other words....The software programs were wrong!

What does a flesh and blood underwriter look for in a manual review of your credit report?

How much credit card debt do you have? $40k is a rough maximum limit that underwriters will accept. This often times can be overcome by highlighting strengths in other aspects of your financial situation.
How many open trade lines do you have? Underwriters don't like seeing less than 5 open trade lines on your credit report. The less information being reported to the credit bureaus, the more easily your FICO score can be skewed. When you have less than 5 open trade lines on your report, your FICO score becomes insignificant.
What payments have you been late on? Late payments on mortgages or auto loans are larger red flags than late payments on credit cards. Usually, when people get in financial trouble and can't pay all of their bills, they will pay the mortgage first and use whatever money they have left to pay their other bills. Auto payments are usually paid after the mortgage. An underwriter will assume that when a borrower chooses not to make their mortgage payment first that they were at one point so strapped for cash that they couldn't pay ANY of their bills. Underwriters will view multiple late mortgage and auto payments as a sign of impending bankruptcy.
Do you own a home? If so, do you have equity in your home? Traditionally, home ownership is viewed as a sign of financial strength. This is still true if you have equity in your home. The logic is that if you get into trouble you can re-finance or sell your property in order to cash out some equity as a last resort before declaring bankruptcy. If you are maxed out on your mortgages and HELOC's, it is a sign that you owe more on your home(s) than the fair market value of the property(ies). In that situation, home ownership will be viewed as a weakness rather than a strength.

An equipment leasing professional will be able to decipher your credit report and point out your strengths and weaknesses before a manual review by an underwriter. You should always be able to provide logical explanations for your weaknesses before the approval process.

DON"T LET THE UNDERWRITER MAKE HIS OWN ASSUMPTIONS ABOUT YOUR FINANCIAL CONDITION.

Your Dimension Funding representative will present underwriters with explanations about your weaknesses and highlight your strengths before any underwriter picks apart your credit report. In this day and age it is not enough to simply have a good FICO score. Every credit profile is different, and it takes a trained eye to spot the red flags and strengths of your financial profile.

Eric Johnson
Account Manager
Dimension Funding, LLC
Dimensionfunding.com
Phone: 949-608-2247
ejohnson@dimensionfunding.com

Dunn & Bradstreet - Love Em' Or Hate Em', They're a Monopoly Here to Stay

2009-12-30T15:20:00.000-08:00

If your business is not listed with a public exchange (NYSE, NASDAQ, ect.), then your business' financial condition is an utter mystery to your potential creditors. How are they supposed to know whether or not your company pays its bills on time? How will they know what kind of financial condition your business is in? Dunn & Bradstreet tries to illuminate this mystery, but the key word is "TRIES".

Small businesses dwell in a world of anonymity because their financial statements are not public record via the Security and Exchange Commission. This obscurity can be overcome with the help of your Dunn & Bradstreet report, but beware, this report can be a blessing and a curse. Let's examine Dunn & Bradstreet's role in the credit decision process in the context of the general factors weighed by underwriters when considering a loan approval.

Lenders crave information when making credit decisions. They love it. It makes them feel more secure. Think about it...If somebody came up to you and asked you if they could borrow $50,000, what questions would you ask this person before agreeing to loan them the money?

What are you going to use the money for?
How long will it take you to pay me back?
What is your current financial condition?
Do you have a consistent history of paying your bills on time?

The answers to these questions help make up the risk profile of your business. The first 2 questions are pure common sense and don't need any elaboration. Let's concentrate on the last 2 questions.

What is Your Current Financial Condition?

If your company is traded on a public exchange, an underwriter could simply go to Edgar Online and look up the financial statements and disclosures that your company filed with the Security and Exchange Commission. Your financial condition would be clear and an underwriter would most likely have all the information that they love and crave so much available to them with the click of a mouse. Of course, most small businesses do not report to the SEC.

So what does any of this have to do with your business? If an underwriter cannot determine your present financial condition, then your ability to repay your debt remains uncertain. Underwriters hate uncertainty with a zeal equal to or greater than their love of information. This uncertainty increases your risk profile thus raising their required return a.k.a. the interest rate that you will pay.

Let's say that you do not have financial statements available, and/or your financial condition is not what you would like it to be (ex: low profitability, little to no equity, high debt ratio, ect.). How do you overcome this challenge? Well, that leads us to our final question and to an explanation of Dunn & Bradstreet's role in the credit decision process.

Do You Have a Consistent History of Paying Your Bills on Time?

Since nobody has a crystal ball telling them with absolute certainty that you will make all future debt payments on time, the next best thing is to look at your past performance to see whether or not you have established a pattern of timely debt payments. If you can demonstrate this pattern, your loan will be far less risky in an underwriter's mind.

This is where your Dunn & Bradstreet report comes into play. Dunn & Bradstreet compiles payment history from your company's creditors in the same way that credit bureaus (Experian, Equifax, and Transunion) compile information on individuals. Dunn & Bradstreet also assigns your business a credit score just as credit bureaus assign individuals a FICO score. This score will be weighed by underwriters as they assess your risk profile.

Whether you realize it or not, your creditors may be regularly reporting your payment history to Dunn & Bradstreet. These are typically suppliers who have granted you net 30+ terms. They track late payments as well as timely payments. A favorable D&B report will certainly lower your risk profile and, at the same time, lower the interest rate that you will pay on future loans. A derogatory D&B report will have the opposite effect. This is why you should check your D&B report to make sure it is accurate.

D&B is notorious for making mistakes and posting outdated information on their reports. You may be getting declined for loans based on bad information provided by D&B without even knowing it. Since D&B is essentially a monopoly in the field of business credit reports, it is vital that your report reflects correct information.

Luckily, it is much easier to clear up errors with D&B than it is with the three major credit bureaus...so long as you have a good contact. As a small business lender, Dimension Funding has regular contact with D&B and has been able to get mistakes corrected within a few days of providing supporting documentation.

Whether you love them or hate them, Dunn & Bradstreet's monopoly on business credit reporting has solidified as credit markets have tightened. Their reports have become more relevant to assessing risk since fewer small businesses show profitability or positive equity due to the recession.

Eric Johnson
Account Manager
Dimension Funding, LLC
Dimensionfunding.com
Phone: 949-608-2247
ejohnson@dimensionfunding.com

Brokers and Middlemen - Facts & Fiction

2009-12-22T10:37:00.000-08:00

Are brokers and middlemen in the financial industry as evil as society tells us they are? The answer is "No". Brokers and middlemen serve an essential function in today's financial system. They help make our system more efficient and allow borrowers and lenders to benefit from economies of scale. We will examine the facts and fictions regarding middlemen and brokers in the equipment leasing industry.

There is a stereotype pervasive in the financial world that middlemen provide no benefit to either borrowers or lenders and do nothing more than stand in between the two parties in order to siphon money off the transaction for themselves.

Let's examine this accusation shall we?

First, I think it's safe to say that if brokers did not provide an essential function, they would not survive for long. That is the nature of business. Of course that leads us to the inevitable question, "what is the essential function that brokers provide?"

Like all businesses, lenders have a target market and a niche. In other words...they specialize. A good broker will have relationships with a variety of different lenders...each having their own niche. This broker will be able to pair you up with the lender that is the best match for your transaction. As a borrower, if you were to go direct to a lender who really wasn't a fit for you, you will wind up paying more money than you should. Had you gone to a lender who specializes in providing financing for the type of transaction you are trying to do, you would have received more favorable terms.

Brokers do earn a living by providing this service. This is not a philanthropic enterprise. A common misunderstanding is that had you gone directly a lender you would have avoided paying points to a broker. The truth is that brokers can get you more favorable terms than you would otherwise get directly from the lender due to the broker's long-standing relationship with said lender. Brokers help lenders become more efficient because they only send lenders deals within the scope of that particular lender's niche.

Another industry myth is that direct lenders do not charge points since they make their profit by charging interest. This is not true. Direct lenders do charge points. Here's how it works:

A lender will have what's called an Internal Rate of Return (a minimum interest rate) that they are required to charge their clients on loans. Anything that the buyer signs up for above and beyond that internal rate of return will go to pay a commission or a bonus for the representatives involved in the transaction. They are motivated to charge the client the highest rate they possibly can since the representatives involved in the deal earn the spread between the internal rate of return and the rate paid by the borrower. In other words, the points paid by the borrower are rolled into the loan.

Since brokers pre-screen deals, submit deals in volume, and do their own marketing, lenders' overhead is greatly reduced. This reduced overhead causes the internal rate of return to go down for transactions submitted through a broker. Often times, a broker will assume some of the risk of default allowing the lender to reduce the internal rate of return even further since the lender's risk exposure has been reduced.

This process benefits borrowers, lenders, and the financial markets as a whole. It allows lenders to reduce overhead, increase volume, and reduce risk. The end result is that everyone benefits from economies of scale.

Eric Johnson
Account Manager
Dimension Funding, LLC
Dimensionfunding.com
Phone: 949-608-2247
ejohnson@dimensionfunding.com

Keeping Your Options Open

2009-12-22T10:34:00.000-08:00

The benefits of diversification not only apply to investing, but to how you spread your debt exposure. Most small businesses depend on credit in order to survive. Diversifying your debt exposure will help you survive this recession. Here's how and why you should diversify your debt.

Credit is tight. Loans are hard to come by. Lending guidelines are getting more conservative. These are the consequences of our current economic crisis. Unless you've been living in a cave isolated from society for the past year, you know these facts to be true. You have probably also heard the terms "Green Shoots" and "Economic Recovery" being flung about by economic pundits over the past 6 months or so. These are the same pundits who in 2007 were saying that it was impossible for the United States to go into recession given the strength of our financial markets. In other words, don't believe everything you hear. Credit may remain tight for some time. Everyone has an opinion as to when/if credit will loosen up, but nobody has a crystal ball guaranteeing a timeline as to when it will happen. In the meantime, we should all heed these wise words:

Hope for the best
Prepare for the worst
Expect the unexpected

Most small businesses depend on credit in order to survive at some point during their fiscal year. In an environment of capped credit lines and tight money, small business owners should take advantage of alternative methods of financing. If you have an existing credit line tied to the current prime rate (which is now at an all-time low), you should use it sparingly. Lenders are extremely skittish right now and an increase in your outstanding balance may spook them into capping your line. This has happened to many small business owners in the past year.

You should leave this credit line open for emergencies. Should something extraordinary come up you can take this line down in one big chunk. If you max out your line in one shot, at least you will have a large sum of cash at your disposal before you get capped. In the meantime, you should leave your line open and use alternative forms of financing to fund your operations.

There are several programs still available to the small business owner. You can use equipment leasing to finance your asset acquisitions instead of using cash. You can use a working capital loan program secured by your business' cash flow (bank and merchant accounts). You can finance your account receivables.

Be warned, all of these options will be more expensive than using that line of credit you have established with your bank. There is no doubt about it. The average business owner will have a hard time signing off on a more expensive form of financing when he still has that line of credit with that beautiful interest rate attached to it. For some people, paying the lowest interest rate possible is a matter of pride. Pride happens to be one of the seven deadly sins for a reason. It clouds rational judgment. Once a business owner maxes out that gorgeous credit line, it will be nearly impossible for him to secure financing elsewhere. He will be capped and it will be too late. Alternative lenders will be spooked by the fact that he had to max out his credit line and will view the exposure as a sign of impending bankruptcy.

Keeping a clear head and keeping your pride in check will help you survive anything so long as you heed these words...

Keep your options open

Keep your lines of credit open
Diversify your debt

Eric Johnson
Account Manager
Dimension Funding, LLC
Dimensionfunding.com
Phone: 949-608-2247
ejohnson@dimensionfunding.com