In a stunning revelation, the World Bank recently noted that 1.4 billion people worldwide are unbanked, meaning they have little or no access to credit.
This is because they lack the formal credit histories required by traditional lenders, according to researchers at the University of Notre Dame. They went on to suggest the viability of “alternative data for credit scoring.” But that approach could be years away, leaving millions of entrepreneurs and consumers without a suitable solution.
Peter J. Burns, III, the founder and CEO of Burns Funding, added that the problem could get worse before it gets better.
“The problem is banks are no longer incentivized to loan money,” said Burns. “Thus, there is little pressure on the credit rating agencies to be fair and equitable with consumers. Approaches, like this, that are designed to improve creditworthiness, are on the horizon. But they are still a long ways off.”
Burns Funding’s Novel Approach
“At Burns Funding, we are exploring ways to sidestep traditional banks, which are dis-incentivized to loan money, with alternative funding vehicles. Our most compelling offering at the moment are shelf corporations.”
According to Wikipedia, a shelf corporation is “a corporation that has had no activity. It was created and left with no activity – metaphorically put on the ‘shelf’ to ‘age.’ The company can then be sold to a person or group of persons who wish to start a company without going through all the procedures of creating a new one.”
As part of the Burns Corporate Capital Program (BCCP), clients can purchase a shelf corporation, which typically costs $15,000, in one of two ways. They can pay for the shelf out of their own pocket. Or Burns Funding can then provide the capital to clients to purchase the shelf corporation by helping them cost-effectively secure capital from their credit cards.
“Once they have the corporation in hand and complete the requisite paperwork, they can obtain access to credit lines well into six figures in as little as 50 days,” added Burns.
Burns, himself a serial entrepreneur, expects the BCCP to soar in popularity.
“There are hundreds of thousands of small business owners, who have the credit score, but can’t substantiate the income through W-2s,” he said. “They simply are not able to obtain significant unsecured funding to pursue their business dreams.
“It has been barely a year, and we have already secured, or are in the process of securing, more than $50 million in funds for clients.”
Burns has tapped into a new, winning approach. But it hasn’t been easy.
“You still have to have a decent credit score to qualify for a shelf corporation,” said Burns. “We have taken steps to help our clients through a partnership with Credit Ready. They put consumers first, unlike some of its competitors, who are actually incentivized to market credit cards, which may or may not be good for consumers.”
And while Burns if full of praise for Credit Ready, the feeling is mutual.
“Burns Funding is accelerating access to larger credit facilities for small businesses, who might otherwise be stuck with personal credit issues,” said Stepen Campbell, the CEO of Credit Ready. “Peter's approach has immense appeal to founders who need a fast track to business funding, but don't yet have the time in business or revenues to qualify with a traditional lender. This is a powerful tool for entrepreneurs.”
Credit Ready Delivers Advice for Getting Higher Scores
Campbell is helping Burns Funding clients and consumers, in general, to avoid mistakes that hamper their creditworthiness with several common-sense suggestions.
“There are a few common mistakes that people make regarding their creditworthiness, primarily in the area of misunderstanding utilization and timing. Many consumers assume paying their balance after the due date, but before interest accrues helps their score. In reality, utilization is captured at statement close, so running balances near limits (even if fully paid later) can tank scores.”
Campbell recommended that consumers “keep your utilization as low as possible if thinking about major purchases like a car or home. This will ensure you have the best scores and qualify for the lowest rates.
“A second common mistake is underestimating the impact of small, missed payments. A single 30-day late on a card or loan can drop scores 80-100+ points, much more than consumers think. There are ways to work with the lender to remove those late payments, but if the late payments have continued for 2-3 months it is unlikely a lender will remove the late pay and the derogatory is going to impact you for many months unless handled carefully.
“Lastly, consumers get in trouble with thin-file issues. A large group of people simply don't build credit early enough, including young adults, immigrants and the unbanked. They assume ‘no debt = good.’ But the problem is that it results in being unscorable or paying much higher rates later.”
What Campbell recommends “is continuously building credit and ensure you have a good credit mix. Since age of accounts is also a factor, the earlier you get started with multiple credit or debt facilities the better your credit will be in years to come.”
As Burns and Campbell illustrate, borrowers have options when it comes to securing capital and embracing their entrepreneurial dreams.
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