Over the next two posts, we’re going to take a look at two types of business that may seem to be very different—and they do indeed project contrasting images to the general public—but are both considered to be high-risk businesses. Our hope is that these concrete examples will help you gain a better understanding of the nature and challenges of high-risk businesses. That knowledge will arm you to make better decisions for your business and implement measures that will more effectively take your business in the direction you have chosen.
The first type of business that we will examine is credit repair services. What is “credit repair” anyway? To repair something is to take it from a state of being broken or malfunctioning to a state of being whole or functioning correctly. So, “credit repair” is the act of making broken credit whole. Or in other words, the act of making bad credit good.
The origins of the English word “credit” can be traced back to the Latin word credere, which means “to trust, entrust, or believe.” It’s related to the word “creed,” which refers to a statement or collection of beliefs. So, your “credit” is really just another way of saying “the degree to which certain parties trust you to fulfill your obligation to return something that you have borrowed.” (Note that the Latin word creditum refers to something entrusted to a person.) In our current context, then, “credit” is “the degree to which banks and other financial institutions trust you to pay back the money you have borrowed, and to pay it back according to the terms you agreed to.
Credit repair businesses are, of course, part of the extremely broad financial industry. The services they provide include coaching on general financial matters, as well as more focused guidance on specific financial issues. Two of the most common things that people go to credit repair businesses for are to get help improving their credit scores and to get help with debt consolidation. With unwise and unhealthy levels of debt so prevalent in the United States currently, stretching from single individuals to the federal government, it should be no surprise that credit repair is a growing market.
There are a variety of reasons that your credit score changes. One important part of credit repair is to increase the number of factors that will improve your credit score and to decrease the number of factors that lower your score. Some of the things that hurt your credit score can be prevented, and it is often a very simple process. For example, assuming that you have enough income to cover your reasonable needs, you can simply pay your bills on time. You can pay back loans according to the set schedule. You can avoid having (or even applying for) more credit cards or loans that are realistically necessary. Make a budget and follow it.
On the other hand, much of what we experience in life is unforeseen and unpreventable. Sometimes we have financial struggles despite making wise choices, exercising self-control, and otherwise doing our best. It could be caused by illness, injury, or death. We may lose a job due to a severe economic downturn, or simply because changes in technology or circumstances have changed or even eliminated the market. Maybe we thoughtfully and carefully made an investment in a business venture that was expected to succeed, but factors outside our control prevented it from happening. Maybe we were simply wrong in our assessment of and approach to some financial matter. Maybe we thought that we would be good enough at something to make a living doing it but ended up not being good at it. At all.
All of those things can result in a person finding himself or herself in some degree of financial difficulty. In such cases, we will probably be unable to do all of the things that will improve our credit score and maintain it at a favorable level. More often than not, the inability to do the things that help your credit is identical to doing the things that hurt your credit. For example, paying your bills on time is good for your credit score. If you lose the ability to pay your bills on time, you will miss payments or make them late. Missing payments or making them after the deadline is bad for your credit score.
When people get deep enough in debt or have their credit score drop far enough, it’s easy to feel like there’s no way out. In such cases, getting help from a credit repair service or a qualified adviser may be the answer. Even if you are not in financial straits, acquiring the tools and knowledge to wisely manage your finances on your own is a very good idea for everyone.
One reason that a credit repair business might be seen as high-risk is that the business’ customers are all people who are having problems making payments, or who have a history of such problems. That means that your business faces an extra high risk of not getting paid. If your business has insufficient revenue, the bank that processes the payments to your business is at risk of not getting paid.
Another factor that may result in your business being seen as high-risk is the risk of fraud. There are, unfortunately, people and businesses that target people who are desperate or otherwise vulnerable. An advertisement for debt consolidation at an amazing interest rate could actually be a golden ticket to having your identity stolen. The nominal fee that you’re asked to pay for consulting services may end up financing scammers’ purchases of illegally obtained names and phone numbers.
The clients of credit repair companies may even be the ones engaging in fraud. Scammers will approach from whatever angle works in a specific situation. If you are careful with your business, aware of the possibility of fraud, etc., and use common sense and basic critical thinking, it should not be difficult to protect your business from fraud. The problem is that many people do not use care, maintain awareness, use common sense, or employ basic critical thinking, and are therefore susceptible to being deceived. Banks and other financial institutions know that, and may automatically assume that your business has a high possibility of being victimized by a scammer.
However, having your business labeled “high-risk” and being unable to open a business account to have payments processed in a big bank is not a death blow. There are other options available, such as utilizing payment processing services, which have a variety of advantages anyway. There are even payment processors that specialize in providing services to high-risk businesses and industries. They are designed specifically to deal with and overcome the variety of obstacles that are created when a business is slapped with the label “High Risk.”