Our guest blogger, Larry Chiang, is an instructive humorist. If you liked 9 VC’s You’re Gonna Want To Avoid, you’ll enjoy this submission on some all-important credit management for entrepreneurs. We’re co-sponsoring Larry’s secret event on Aug 28 to activate your new knowledge and his “What They Don’t Teach You at Stanford Business School” at Blog World.
by Larry Chiang
Entrepreneurship is about going to hell and living to tell about it. What really goes south is your credit score. Remember, there’s a right way and a wrong way to do EVERYTHING, so let’s mess up our credit and maximize how we monetize our high FICO score.
Note: This is not for European people or foreign individuals fresh into the USA. Ideally, it is for a fresh college grad with a FICO score over 750 looking to start a business. All of these tips are for entertainment purposes only. I recommend consulting professional help before executing on an idea.
1. Default on a Second Mortgage
Try to default on a second mortgage to the tune of about $30-75k. Remember, we can’t get kicked out of our home if our first mortgage is in good shape. Defaulting on the second mortgage results in a lien.
2. Avoid Charge-Offs for Small Amounts
We never, never, never charge-off for under $2,000. A ‘charge-off’ is when the bank recognizes you as a deadbeat and gives up trying to collect on a bill. Normal consumers (non-entrepreneurs) get a “9” for charging off $200.
3. Be Your Own Collection Agency
Let’s say you owe $55k on a piece of equipment your company desperately needs to buy and resell. The revenue from selling it got channeled into meeting payroll, so you are left with the expense secured and guaranteed with your name. The solution: be your own grim reaper and negotiate to collect on your own bad debt.
Collection agencies offer 20-35c on the owed dollar. If you are collecting your own debt, offer up 55-58c. It is hard to refuse.
4. Kill Them with Kindness
Collectors are used to being treated inhumanely. Kill them with kindness by offering 55-58c but in a payment plan with no interest. Something in the $150-200/month range. It kills me because, using the time value of money, that 55-58c just became 30-45c based on time value of money because you’re not paying additional interest.
Pay no money to a collector unless you:
- a. Have a written contract from the originating creditor you owe. As entrepreneurs, we do not honor the transitive property of debt collection because we only deal with the originating party.
- b. Are negotiating with the originating creditor in the loop.
5. Monetize Your FICO
You can only monetize your FICO if you have a high credit score. Duck9 can help you graduate from a four-year college with a FICO over 750. The national average is 585. As a rule of thumb, we as entrepreneurs will only take a 50-point FICO hit for $20,000++.
6. Organize Your Debts
Organize in a manila folder every debt. Track every debt and plan for a way to pay it off.
7. Borrow Against a Receivable
Your company has sales, right? Well, for every thousand dollars in sales, you can borrow against it by offering the receivable to a bank to secure a loan.
8. Let Them Chase Bad Money with Good
There are going to be deals in business that go wayward in some faraway state that you cannot collect on nor want to try. Other people chase bad money (money not likely to pay because the name is mixed and they operate between here and Asia) with good money (good money is your cold hard cash getting sent to an attorney). Genius is knowing the difference.
9. Get Revenue by Saving Your Customers Money
Once you can show savings, have your customers pre-pay a portion of those savings UPFRONT.
Good luck out there!
Larry Chiang is the founder of Duck9, which educates college students on how to establish and maintain a FICO score over 750. He is a frequent contributor to GigaOm’s Found Read. His earlier posts include: How to Work The Room, 8 Tips On How to Get Mentored, and 9 VCs You’re Gonna Want To Avoid. You can read more equally funny, but non-founder-focused lessons on Larry’s Amazon blog.
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