How Alternative Lending is Changing FICO

By Josh Hart | uncategorized 0

The FICO score is an institution in the financial world, a staple in ranking consumer credit. It was established in the 1950s by Fair Isaac Co., but didn't become widely available to lenders until 1987, and consumers couldn't even legally access their scores until 2003.


FICO scores highly influence the credit report that lenders use to rate the risk of lending money to borrowers, taking into account a person's credit history, including types of credit and length of loans, payment track record, level of current indebtedness, and most recent credit applied for.


The trouble with Fico scores is that so many consumers are penalized by their score, rather than enabled. If you have a weak, thin, or short credit history, you may automatically face credit difficulty, and rebuilding weak credit is tough to do. You enter a cycle of poor or no credit and little opportunity to improve it because lenders turn you down. More than 30 million Americans who are essentially "credit invisible" face this problem.


The new credit standard


Even FICO and other credit rating agencies realize the need for change now that alternative lenders are rating borrower's credit using factors beyond the standard credit history. Institutions such as FICO, Equifax, and Lexis Nexis Risk Solutions are collecting a variety of information, including address and telephone changes, overall change of a larger loan amount, checking account history, property records, cell phone and cable accounts, and other public data to consider a person's credit risk.


TransUnion, one of the big three credit rating agencies, is developing its own credit ranking system called CreditVision Link. The scoring process will look more closely at consumers who get overlooked by today's FICO score, attempting to create a "meaningful" score to the majority of American consumers.


BizLender's rating process

Alternative lenders have long bypassed the traditional FICO way of reviewing a borrower's ability to repay a loan based on real-time data and a proprietary algorithm. Faster access to and processing of a borrower's data leads to much quicker lending decisions and advancement of cash to the borrower.


A leader in alternative finance for small businesses, BizLender uses three months of business records and requires $10,000 per month in average sales to consider a borrower. Rather than penalize for poor or questionable credit, they consider the ability of the borrower to repay an advance based on current earning potential. Alternative solutions like business cash advance or merchant cash advance allow borrowers to repay an advance in small, daily or weekly increments instead of large monthly payments towards a loan, and rather than base a borrower's fee on an APR, BizLender uses a factor rate to determine fees.


How is a factor rate determined?

A factor rate is not represented in a percentage like an APR, rather it's a decimal figure that falls within a range of 1.1 to 1.5. Where a business falls depends largely on the business's industry, how long a business has operated, their average monthly credit sales, and the stability of those sales over a number of months.


FICO scores and credit ratings do not have to determine your ability as a small business owner to borrow cash for business operations, and as more alternative lenders make access to capital a reality for small business owners, traditional credit rating agencies are seeing the necessity and feasibility of changing how scores are tallied. Real-time data and algorithms factor in along with overall business stability (or instability) to determine a borrower's potential to repay a loan, changing the credit standard as we know it.


Has your credit score kept you from applying for cash? Talk with the professionals at BizLender to discuss alternative options to borrow for your small business. Call 855-404-3070 today.

Posted in uncategorized
Last edit: March 6, 2018


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