Equity crowdfunding needs changes

Before implementing the Regulation Crowdfunding exemptions, business fundraising was possible to obtain only from the group of the accredited investors (those who make at least $200k per year , $300k together with a spouse or has $1 million of net worth). Now, all American adults can help businesses raise the needed capital. However, it is already established that the equity crowdfunding needs some changes, in the present order it does not work efficiently. Why is it so?

According to Vincent Bradley (CEO and Co-Founder of FlashFunders), there are a few main reasons:

  1. Businesses which try to raise more than $500k are required to present their GAAP Standard financials. In fact, although it seems to be a sensible solution to the problem of the lack of business transparency for potential investors, the young businesses usually are not ready to present GAAP financials yet. Simply because it is an additional cost and usually it is not prepared in the early stage of a company’s growth.
  2. Yet another obstacle to overcome is a Form C requirement – it is a 25 page document which can take more or less 50 hours to be filled up, probably with the help of a lawyer, thus, quite costly. The rule says that businesses are obliged to file the Form C with SEC before they start gathering investors.
  3. When it comes to the funds which businesses may receive, they are not limitless. It is not a problem for companies in need of some smaller amounts, but in the case of the bigger enterprises it becomes a hurdle. Reg CF allows businesses to raise no more than $1 million in 12 months.
  4. The next weak point of the equity crowdfunding is 12(g) rule. If a business achieves fundsraising success thanks to the Reg CF and exceeds the amount of $25 million in assets, it will be required to be reported as public. This brings a risk that whether a business is ready/willing or not, it will be made enter the public sphere.
  5. The process of managing the big group of shareholders after the successful fundraising is not easy. Organising the good communication with all the investors may demand some outside help. Startups use the help of special companies (for example Special Purpose Vehicles – SPVs) to gather the group, organize and facilitate the cooperation. This way of solving the problem could be a good idea for equity crowdfunding as well, which is supposed to gather thousands of investors in one fundraising. Unfortunately, SEC does not allow SPVs to take part in the Reg CF fundraising process.

The Fix Crowdfunding Act (FCA) gives hope for improvements in the area. It is waiting to pass through the Senate, but it already enables us to hope for the better crowdfunding conditions. This bill is going to repair the problematic faults of Reg CF and to modify the rules so that they would become more convenient for young fundraising companies.

What exactly can we hope for now?

Thanks to the FCA, the special purpose vehicles may be allowed in the equity crowdfunding and the 12(g) rule will not force companies to go public.

What else should be done?

The initial costs of lawyers or CPAs can unable many small businesses to join the equity crowdfunding. The companies should have a chance to appeal to investors and check the “ground” before they risk quite a big amount of money. Furthermore, the limit for the raised capital should be increased to $5 million. This would attract more companies, as many need much more capital than $1 million.

The potential of the equity crowdfunding is very promising, yet still there are spaces which need improvements to make the idea function better. It is all doable, but needs some time, experience and expertise.

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You want to be successful in crowdfunding? Be attractive!

There are plenty of useful articles describing ways to succeed in crowdfunding. So many tips, suggestions and approaches! However, we all seem to forget about one rule, apparently the most helpful here: attractive people are usually perceived as more trustworthy and reliable than those of the average or less attractive appearance. It is our subconscious prejudice which is utilized so successfully in the world of marketing. In childhood, we were taught that ugly people are bad and those beautiful are good. Not to blame the fairy tales, it is in our nature – we prefer nice pictures.

Is it possible that even business matters are controlled by such biases?

Yes, it is. Let us start with a charity example. Nichola Raihani (University College London) and Sarah Smith (the University of Bristol) carried out an experiment which was to check whether people’s attractiveness would help them raise more funds during London Virgin Marathon. Each marathoner had a page where potential donors could write their names and the amount of money they offer. What was the result? More attractive marathoners of both sexes gained more money, but the more interesting conclusion concerned the lists of donors. It turned out, that the size of the previous donation on the list tended to shape the next donor’s decision. Men showed a typical competitive behavior on the attractive women’s list. If the previous man’s donation on the list was large, the next man proposed even more to be seen as wealthier, more generous and cooperative. The generosity was much higher in the case of the attractive women’s lists than of those less attractive. What is interesting, women did not demonstrate such behavior.

Another experiment was carried out by some researchers from Hong Kong University of Science and Technology, the National University of Singapore, and Nanyang Technological University in Singapore. They decided to check how the physical appearance affects investors’ decisions on Kiva. As in the previous example, the decisions were based on the appearance – here available on the users’ profiles. Investors, either consciously or subconsciously, tend to assess the risk basing on the borrower’s appearance, but actually, our attractiveness does not proclaim that we are more reliable. The researchers claim that too wide choice and lack of any criteria which could help make the decision, leaves the investors to the formulaic stereotypes. The biases were not influencing the choices of the most experienced investors, though.

The old stereotypes prove to be up-to-date also in the modern online world. That is a worrying trend, especially in the age of women and men equality. In fact, it says a lot about our human nature. Can we contravene our innate, natural perception of the world? We probably can, but so as to go beyond the biases we need to become aware of our inclinations and avoid judging people on their appearance. Basing our investment decisions on the physical qualities of the potential business partners is too random, thus, unreasonable and can just cost us a lot.

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Crowdfunding websites – comparison

Crowdfunding platforms used to gather artists of many types, who searched for funds in order to finance their projects. How is it now? At present, this way of gaining money for your business is becoming more and more popular and many entrepreneurs decide to enter the game. Some of the websites are focused mainly on start-ups, which brought a great chance for the entrepreneurs in their prime. Nonetheless, there is more to it than collecting money. Creating a good campaign is simultaneously, a great source of marketing success. Good initial performance becomes an opportunity to show one’s reliability and gain interest of some professional investors.

Surprisingly or not, crowdfunding is not so easy. You need a strategy and be convincing if you want to interest hundreds of strangers. The main purpose of crowdfunding is to make funding process online. That is why, you must heavily work via the internet. Especially, Twitter, Facebook and other highly popular social websites should become of great interest to you.

In this article, we provide a short characteristics of four most popular platforms which vary in terms of crowdfunding approaches. Before you enter the game, learn the rules and find the best option for you.

Kickstarter

This site was created in 2009. Since then, it has generated at least 13,000 successful campaigns. Starting with the artists, now it is gradually becoming a source for innovative entrepreneurs with new products. It is very picky so it is not easy to get accepted. The website centers mainly on artists and creative designers.

Here, you get a fundraising page which includes a funding goal, a video presenting your idea and the deadline (1-60 days after launching a product). Your contributors are supposed to receive a “reward” (for example a prototype) for their investment. If you fail to meet the goal before the deadline you earn nothing. If you are successful you pay 5% of your raised funds and 3-5% to Amazon Payments.

Profounder

A site which helps you build your capital on all stages of your business. It provides many useful tools for entrepreneurs, which help manage the company. It is free and intended mainly for entrepreneurs with already developed investors network. Investors, and in the case of this website these are only people whom the entrepreneur already knows, receive equity shares in return for their contribution.

Indiegogo

The platform working since 2008, the one with an open approach. As long as your project is legal, it is accepted.

Here, your project gets a profile page for which you provide a video, write a summary and a description – incentive for investors. You also set a goal and a deadline – 1-120 days after launching. However, unlike on Kickstarter, you keep money even if the goal is not met – then it costs you 9%. If you are successful you pay less – 4% of the raised funds.

Microventures

Visit this website if you need experienced angel investors for your technology-connected startup. In return for your equity shares, you may receive from $100,000 to $500,000. Unfortunately, if you do not meet the goal the funds are returned to the investors. Generally, this website specializes in technology startups, but it accepts other projects, too. In order to have your project submitted you pay $100 and then $250 for due diligence. 5-10% is taken from the final successful raise.

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10 best websites for crowdfunding

Crowdfunding is a perfect means of gaining money for your business. It is more “pleasant and friendly” than going from bank to bank or form one investor to another, carrying a bag full of necessary documents. If you have not been successful in the traditional ways of finding a good financing for your startup, or just have never imagined to do this in this way, crowdfunding comes with help. It enables you to find a large group of investors and to choose what kind of return they will receive.

Sally Outlaw – founder and CEO of Peerbackers – gives some advice and suggestions in her book about crowdfunding Cash from the Crowd. The list below presents the top 10 of crowdfunding websites according to Sally Outlaw, divided into three groups depending on the kinds of returns which investors may receive.

I invest and want to receive a reward

Indiegogo – a website for everyone and allowing to obtain money for anything. While it charges less than the others for success (4% not 5%), it charges as much as 9% if you do not achieve your aim.

RocketHub – focused on the arts in its beginnings, later has turned also to business, education, science and social good projects.

Peerbackers – a very popular website which is centered on finding entrepreneurs or innovators from around the world (including the very young group of 13-17 via student organizations).

Kickstarter – this website focuses on supporting creativity (design, film, publishing, music, gaming or technology). It is not easy to meet the conditions and be approved here. Unlike the previous three websites, Kickstarter is intended for creators from U.K., U.S and Canada only.

I invest if for a debt

SoMoLend – a peer-to-peer platform which gives businesses a possibility to get a loan from either friends and family or accredited investors or banks. It is exceptional among the similar websites as here the FICO score is not so important in the process of your creditworthiness assessment.

Endurance Lending Network – the platform connecting small businesses which search for maximum $500,000 of debt capital from lenders other than the traditional ones (individuals, debt funds, family offices, wealth management platforms).

I invest if I receive equity shares

These websites differ from the typical crowdfunding places, as the group of backers consist of only accredited investors. However, they can still fit crowdfunding as the investors are allowed to invest lower amounts of money and the pooling element is present.

Grow Venture Community – a community-based platform. Here the entrepreneurs have the opportunity to keep in touch with investors, experts but also team members, new clients or partners

MicroVentures – here you can receive financial help from angel investors who use the online platform (SEC) in order to invest small portions of funds in startups.

AngelList – known as the Match.com, intended for entrepreneurs incorporated in Delaware and with at least $100,000 gathered. Its worth knowing because, firstly, it has a good system creating a strong investor pool and, secondly, it gathers backers in a single-purpose fund.

CircleUp – a website centered on high-growth consumer product and retail firms. It charges no fee in the case of family or friends investments. The fee is charged when you gain money from new investors.

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Investing by Crowdfunding

Investment crowdfunding is a means of gathering money for a company in which you look for a big group of small lenders. Each of the lenders is supposed to invest a small amount of money and receive equity shares in return. This investments option used to be available to accredited investors only, yet now the door has been opened to the wider circle of investors.

Apart from equity shares, investors can also receive debt – here a group of individual investors invest in a small part of a big loan. This kind of debt investment includes a higher risk level, hence, the interest rates are also higher than it is in the other options. Nevertheless, the risk can be diversified by sharing the whole amount of investment money between a numerous loans rather than investing in only one. Lenders have the knowledge of the intended use for the loan and its terms such as interests rate, loan’s length and probable credit rating. Generally, borrowers choose this option when the traditional ways of financing are too expensive or unavailable for them.

Crowdfunding vs. traditional sources

Crowdfunding has become an alternative for traditional ways of start-up financing. Bank loans, borrowing money from family or friends, angel investors etc. are the options which are not always available and profitable. In the case of investment crowdfunding, start-up entrepreneurs can find a good source of financing for the price of their shares adequate to the amount of money invested. By the means of crowdfunding, beginning entrepreneurs have the chance to find financing comprised of small investments made by a large group of backers.

LendingClub and Prosper are micro-lending platforms which enable lenders to become backers not part-owners of the company. Such backers profit from a loan by receiving interest payments throughout the whole life of the loan.

Can we avoid failures and losses?

Obviously, which is typical of investing process, the risk is present in both equity and debt investment options of crowdfunding. On the other hand, the risk can be lowered by cutting the capital into small pieces and investing in a large amount of options. The perfect way to decrease the risk would be an insurance, yet for now, this issue has been only discussed as the option available for a premium payment.

Any trouble with investing?

If you feel that you lose all the lucrative chances, take care of being well-informed. Look through the Internet for more information and observe the market so as to stay always up to date. Receiving significant news and current market analysis on your e-mail should also help you gain a good insight into the topic. And what if your motivation is continuously wearing out because of losing trades you keep making? Consider signing up for free stock simulator which will help you practice investing with virtual cash before risking your own money in real life.

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Are You an Income Investor? Consider Peer-To-Peer Lending

The idea of peer-to-peer lending has brought many new opportunities for investors who seek something different from bonds and stocks. In short, as a user of a peer-to-peer lending platform you can become a lender who lends money to individual borrowers or you are a member of “a loan pool” if you want to decrease risk and possible loss. Checking your potential borrower’s three bureau credit scores  gives you a complete look of their credit and helps you make the best decision.

The best quarterback

Lending Club is the biggest player in this market. Here $35,000 is a maximum amount of a loan for a person – with fixed interest rate and for a wide variety of purposes – and $300,000 can go for a business. Lending Club point out that they have strict approval conditions so as to gather the most credible borrowers. According to them, 699 FICO score is the average among their borrowers. Those who apply for a loan receive grades (A-G) which decide on their interest rates that start at 7,34% and end at 25,54% (these are more inviting compared with the average national rate).

Instead of lending all money to one borrower you can diversify the risk of a total loss. In Lending Club you have the option of investing in “notes” – pieces of loans. When you invest $2.500 buying 100 notes costing $25 you lend money to 100 borrowers, and at the same time, you limit your individual loss risk to $25. In case you suddenly need to get out of your investment, you can try to find a buyer for your notes. The problem is that Lending Club cannot guarantee finding a buyer for you, unfortunately. The maximum length of consumer loans is five years and you should be prepared for a commitment for this period of time.

How much do I pay?

When it comes to fees, investors must pay for principal and interest payments they collect. This servicing fee is 1%. The collection fee is 35% of the total collection. In case of necessary litigation, its costs and 30% of fees covering attorney remain on the investor’s side. Investors are not charged with any collection fees if they do not collect any payments. Also the collection fees cannot exceed the amount of money recovered.

More than just one option

Peer-to-peer lending has also other forms, such as professional money managers (banks, insurance companies or private pension funds). They offer partnership in Lending Club investments. Visit Lending Club’s website or contact an investment adviser if you look for some alternatives of peer-to-peer investments in Lending Club.

It is believed that the traditional lending market may be outrun by the peer-to-peer lending or its alternatives. It surely is worth considering, yet still it is not a perfect way of investing for everyone. It involves both high chances for good income and a high level of risk at the same time. It would be advisable to start with a small amount of money, just in case it turns out to be not for you. Still, the prospect of good profit can be really convincing and worth devoting time to learn more about this kind of investments.

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The 7 Peer-To-Peer Lending Websites you must know

Many people can admit that they have rather negative connotations with regard to traditional banks. Inflexibility and strictness make banks rather an archaic institution which loses to the innovative peer-to-peer (P2P) lending system.

To put it briefly, P2P lending uses online platforms to provide a tool which connects potential borrowers with lenders. Eventually, it costs much less time, fuss and red tape than in the case of the traditional banks.

P2P lending has become a great success. The Internet-centered world must have affiliated such a solution to the traditional system’s imperfections. It is an easier, cheaper and faster way of borrowing and lending money.

The wide variety

Along with the growing popularity of this system also the competition between platforms is increasing. The general rules are the same, but the platforms offer differently targeted products. Also interest rates, conditions of eligibility or tenures can vary. We list some of the best known websites which you should visit if you seek a reliable P2P platform.

Lending Club

The father and the biggest player of peer-to-peer lending market. The loans offered by them start at $1,000, and $15,000 when it comes to businesses. The maximum is $35,000 and for business $300,000.

Prosper Marketplace

It is the U.S. prototype of P2P lending platforms which noted a huge growth since its very beginnings. The number of its members reaches 250,000 people. The purposes of loans offered by Prosper are richly varied. You can loan from $2,000 to $35,000 for 3 or 5 years. The annual rates start at 5.99% and end at 36% for the new borrowers.

Upstart

This platform is good for the younger clients with short credit history and low FICO score which precludes receiving a loan in a traditional way. Actually, for Upstart the score is a minor factor and these are your education and work performance which count most. Here you can obtain from $3,000 to $35,000 at an annual rate of minimum 4,7%. They offer loans for a very wide range of purposes.

SoFi

SoFi is a place for the beginning professionals who need help in paying their debts. SoFi’s loans are rather big ($5,000 to $100,000). Unfortunately, to become eligible for their loan you must fulfil certain conditions.

CircleBack Lending

If you have a good credit history and need a lot of money visit this platform. Also here the variety of your loan’s purposes is wide. The interest rate is set between 6.63% and 36% and is dependent on the amount of money loaned and the loan’s durance. Apart from that, your credit score, credit usage or history also influence the interest rate.

Peerform

A platform which offers the annual interest rates between 7,12% to 29,99%. The minimum amount of their loans is $1,000 and the maximum $25,000. Peerform gives a chance for people with low credit scores. They utilize their own Peerform Loan Analyzer which is a substitutive tool for FICO scores. With their loan you can finance many different things like your new car, wedding, house redecorations or debt consolidation.

Funding Circle

This platform is centered on financing small firms. Its creators believe that the banking system does not support small businesses enough and they decided to look for a solution to this problem. What is interesting, the whole thing started with their own experience of trying to receive a loan for 96 times, but to no avail. For now, their result is $1 billion loaned to about 8,000 businesses. Currently, their platform has 40,000 of investors, including the British government. If you need money for your business consider Funding Circle. Their offers start at $25,000 and the maximum reaches $500,000.

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New Chapter Of Banking: Peer-To-Peer Lending

Nowadays, the spotless reputation of banks is in the phase of decrease. Hence, we are offered with something different – P2P (peer-to-peer) online platforms. The generation of “online people” seek an alternative to the traditional banking, aiming at better offers and conditions.

Lending platforms, by the means of online auctions match borrowers with lenders and create a much more convenient way to cooperate. The offered loans usually include a few “slices” taken from more than one lender which makes the deal they sell much more beneficial for both sides than in the case of traditional banking – for instance, the British P2P platform Zopa gives 4.9% to lenders and their personal loans are charged with 5.6%.

While interest rates are extremely low and people lose their confidence in banks, P2P is becoming more and more popular in many countries – the American leaders in the trade, Lending Club and Prosper, own 98% of the market. This phenomena appears to be the natural consequence of the growing access to e-commerce which wins in one of the most significant area – it allows to lower the costs of running the business, even three times.

The next advantage of P2P lending is the fact that it has the power to remove the mismatch present between long-term loans and short term deposit. The only obstacle is to gain trust of the new clients who are used to the traditional banking and would not be eager to invest money in something that they have never heard before.

Worries are undeniably legitimate since all investments involve some risk. What are the main dangers? First of all, it is a platform’s bankruptcy and the threat of losing all money. Apart from that, unlike traditional banks, P2P does not offer any state-backed guarantees which protect your money.

The next problem with P2P is its transnationality. A huge number of foreign investors are attracted to the American market. The fact that it collects money from foreign lenders as well, make any legal problems which occur in this “mixture” unsolvable.

New regulations are to help remove the high risk from P2P businesses through demanding such organization of the firm’s capital which will ensure the money left for remaining loans in case of closing. When it comes to the insurance, for example Zopa and other British firms offer “provision funds” which are to provide help for loans in case of problems. Meanwhile, there are some discussions going on concerning more insurance options.

The majority of money in the American platform – Lending Club – belongs to the wealthy individuals and institution, the rest comprises retail investors. For now, all savers have the same conditions and opportunities, however, some people maintain that it is the matter of time when big investors start to command the market.

Peer-to-peer lending is still developing and with the time passing, it surely will become much more popular. Certain pivotal improvements should help gain more interest and trust among customers. Whether it succeeds or not, depends on the effective marketing, good management and cooperation with the big companies.

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Introduction To Crowdfunding From an Entrepreneur Perspective

Anyone who has ever had the experience of running their own business from scratch, would probably confirm that the Internet is an excellent tool for entrepreneurs. The ability to contact everyone and everywhere from your home has really changed the course of business nowadays. What’s more, the appearance of the social media has opened a wide range of new possibilities. And one of them is crowdfunding.

Crowdfunding in a nutshell

In short, crowdfunding is a device for collecting money needed for your startup via the Internet –mostly the social media and special crowdfunding platforms. This method is based on the involvement of family, friends, customers or individual investors in the fundraising, using their connections to diffuse your ideas to the wider audience.

How does it work?

Raising the startup capital used to be much more complicated and much less effective. The entrepreneurs choosing a traditional way of collecting funds go from door to door with all the necessary documents and devote lots of their time and energy to gain interest of their very limited audience. Crowdfunding platforms, on the other hand, open your business door to much more options than angel investors or banks. You build up your own online campaign, create a showcase and let it be shared between any interested potential investors who, at the same time, have more varied options to help you develop your venture.

What are these varied options exactly?

You have three main crowdfunding types to choose between.
• Donation-based type – you are not supposed to return money to the investors; the examples can be: charities, non-profit initiatives or disaster relief.
• Rewards-based type – your investors are granted with a “reward” in a form of your product or service, depending on what your business provides. This form of “incentive” can be both effective and low-cost.
• Equity-based type – you offer your equity shares in order to receive financial help from the contributors. Therefore, you must share your profits with the investors.

Why is crowdfunding better than the traditional ways?

It has been already stated that crowdfunding is undeniably more convenient and useful, especially for startup businessmen, than the traditional knocking on wealthy men’s door, and here we list a few reasons to prove our point.

1. Using online resources enables you to export your ideas to masses so that they become much more reachable for the potential investors.
2. You can be much more efficient in your efforts to collect the capital. Thanks to your central online profile you can reach all interested contributors at once which saves your precious time.
3. It is an excellent way of promotion and marketing. If you are not present online, you do not exist at all.
4. When you share your idea with a wide spectrum of audience, they give clues. The more suggestions you receive, the more improvements you can make so as to jolly investors into cooperation.
5. One more advantage of using crowdfunding is the overall picture of your business concept which you gain after completing the process of creating your profile. It makes you analyse the idea step by step and helps organize the thoughts.

Concluding, it has never been so easy to make your business ideas work. Learn more about crowdfunding and start being your own boss.

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Fixing problems with FICO score (and enjoying a better life as a result)

Many of us create a list of resolutions for a new year.

Life brings many different types of problems and for some people it is a number on their bathroom scales which is too big and for the others it can be a number of their FICO score which is too small.

You probably are in the group of, let us call it, “financial troublemakers” if you read this article. We will try to help you analyse the problem and fulfill your financial resolution of lifting up your score.

Problems and solutions.

In general, saving money is not as easy as spending it and, unfortunately, the first and the most important solution is to start saving. The good news is that some of the problems can be solved faster. But the whole rest demand a good long term strategy.

Problem no. 1 – Using too much credit.

It concerns you if your habit is to buy too much, impulsively and not necessarily really needed goods.  The habit of spending more than you earn is even worse. Look into your credit report and find out where the problem lies. It can show that, for example, you owe too much on your account, you have too many accounts with balances/retail accounts or the balance to limit proportion is not right. As the 30 percent of the score is influenced by the amount of your debt, the situation in which you continue spending more than you earn is unacceptable and becomes a deterrent for any possible lenders.

Problem no. 2 – Too little credit history.

First of all, such an option is still better than having a bad credit history. Do not get upset if you do not have much credit. Lenders can use a non-traditional credit report, which will show the accounts that are not reported in credit bureaus. These would include for example leases,  student loans, peer to peer loans,  or some utility payments. Also thanks to a regular savings deposit you make, your financial situation will be found settled.

Moreover, you can open one or two credit cards (the limit should be low) and use it to pay while shopping. Yet, it is significant to pay it off regularly on time. Apart from that, another option is to benefit from the good credit history of your family members or friends. When you become an “authorized user” on their account, their credit card history will be also added to your account.

Problem no. 3 – Bad history.

It needs time to rebuild your credit history. If you have collected some “sins” on your account, such as foreclosure,, you must reorganize your current management of finances. The impact your “sins” have on your score lowers with time, so calm down and cool your heels. 12 months of patience and better management will help you pay off your bad actions from the past.

You can deal with it yourself or call for help.

Your finances have 5 years to recover. After this time, you may consider bankruptcy and use court solutions. But first, if you feel that you may not be able to cope with the problem yourself, you can consider professional help. A consumer credit counselor (working non-profit) can give you a lot of useful advice and help you get back on your feet faster.

In conclusion, you should remember that a good plan is crucial. Find out what the problem is, set goals and start building up your score.

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