Business Credit

[slim_jim]

If I understand you correctly......You will have limited liability in a properly structured business entity. Getting to the point that the business has its own LOC will require a personal guarantee.

please shoot it full of holes......

 

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[phlgirl]

I am by no means an expert on this topic; however, from what I have seen so far, it appears that although business credit is not likely to be helpful/effective in propelling your business in it’s earlier stages, it can be extremely powerful once your company gains some real traction. It may not be year 2, 3 or 4…. but once you start racking up serious trade lines and show that you are here to stay, the Personal Guarantees are no longer necessary and your business truly stands on it’s own.

I have yet to see this work first hand but I have spoken to a few people who have this type of scenario in place.

For me, it is about having the money accessible before I even know I want to do a deal. I would like to have multiple lines of credit, from several banks just sitting out there waiting for the next great idea. The focus is not so much on the D&B score (although it can't hurt) but more on building a solid, growing track record on a business, not personal, basis.

 

[Bilgefisher]

phlgirl,

has having a paydex score of 80 helped you in anyway yet? I'm strongly considering taking the steps for a business I just setup but will not be fully utilizing for another 6-12 months.

 

[hatterasguy]

Say I incorporatean LLC this year, and at the end of next I want oh a $200k construction loan. (amount isn't important, but its not going to be more than that)

Say the lot is paid for in cash.

Could I bypass the no credit history of my company by having $50k-$80k worth of cash on hand? That should make the bank comfortable no?

Anyone have any experiance in this?

 

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[RE Taipan]

Hello.

The answer to your question is….it depends on the lender. That is probably not what you want to hear, but it is, in my experience, the most accurate result.

Also, I’d like to take just a moment to clarify a portion of your post so that you are familiar with the terminology you are using as it is easy to get confused.

You discuss “incorporating” an LLC. Technically that is not correct. You incorporate a business, and form an LLC. The differences are subtle but potentially important, so please allow me to go a bit further.

A corporation is, in legal terms at least, a living breathing entity just like you and me. It can do business, own property, sue and be sued so long as the corporate form is adhered to and followed. Generally, in most jurisdictions, this means that you hold at least one annual meeting of the shareholders, you issue stock, file the annual paperwork, pay fees etc. Corporations are run by a board of directors who answer to the shareholders. Almost every corporation will have, as minimum, a shareholder, a president, a secretary a treasurer and at least one director. Depending on the state the business is incorporated in, one person may hold all of these positions simultaneously. The shareholder(s) are the owners of the corporation. Depending on the state of incorporation, and the form of your corporation (C, Subchapter S or 501(c)(3) – non-profit) the identity of the shareholders is known or not known to outside persons. Depending on how you set up and run the corporation, there are various taxable events that might be triggered either for the corporation or for the shareholders. If done right, much of the myth of “double taxation” can be avoided. Corporate shareholder liability is generally limited to whatever amount of investment they made in the corporation in order to purchase the shares.

Let’s compare this to an Limited Liability Company (LLC)

An LLC is, in a legal sense, neither a corporation nor a partnership. Conceptually, it is a hybrid between the two. It is a distinct entity created by state statute that offers business an alternative to partnerships and corporations by combining the corporate advantage of limited liability with the pass-through tax advantage of a partnership. The LLC is similar to (1) a general partnership with limited liability; (2) a limited partnership where all owners participate in management and all have limited liability; and (3) an S corporation without the ownership and tax restrictions. Because of the limited liability feature and the formality involved in its formation, an LLC is more nearly related to a corporation than a partnership.

In most jurisdictions, one owner/member LLCs are generally treated the same as sole proprietorships. Profits are reported on Schedule C as part of your individual 1040 tax return. Self-employment taxes on LLC net income/loss must be paid just as you would with any self-employment business. Multiple owner/member LLCs are treated as a partnership by the IRS. LLC profits are reported and allocated to each of the owners according to the LLC's operating agreement. Each owner is given a Schedule K-1, which shows each owner's share of LLC income or loss. The owner then reports and pays taxes on this income on the owner's annual 1040 income tax return.

Back to your question on business credit. It used to be that most lenders and their underwriters would look at an LLC as nothing more than a partnership. This meant that the typically would require that the borrower would be required to provide the same documentation as if it were a sole proprietorship. While this is still the case with some lenders, other more sophisticated lenders are looking at LLCs as legitimate business entities. Typically, if an LLC had been in business less than 5yrs and/or less than $1M (or $5M for some lenders) in annual revenue will have to produce personal financial for any member who has a 10% or greater interest in the LLC.

With the economic (read: lending) climate as it is…it might be hard to get a lender to approve a one year old LLC on a real estate project.

The better way might be to work the LLC to get lines of credit for a general purpose, letting that $$ season then approaching your lender(s) when you are ready to go. When you get a line of credit, take as much money of it as you can easily get. Although you will start paying interest on this money when you take it, in most cases the interest is tax deductible. Take 20% and put it in a checking account to let it season for a minimum of 3-4 months.

You are seasoning this money for these reasons:

• You can use the seasoning $$ to pay the interest charges. So even if the business does not produce cash flow yet, you can make all your payments and build your credit history.

• The money in the checking account shows to most lenders as a verifiable asset that other lenders can look at when making a new lending approval decision for your business.

This business credit lets you show off the assets and cash, but keep the debt private. This always helps any business get even more money from new banks.

Remember, banks lend money to those who do not need it. And when you season money this way, you look like you don't need anymore which tends to increase your chances of approval.

While nothing is ever cast in stone when seeking a loan, the foregoing (at least as of this point) will prob give you your best chance of obtaining an approval.

Hope that helps a bit. Any questions, please ask.

 

[chuff1026]

if you want more business credit info
check out my blog in my sig
TONS of free info
i have been doing this for a number of years

 

[Runum]

chuff1026, your sig link was removed because it violated the user agreement. We require all members to be contributors to the forum before being allowed to sig link to their business. Please take a moment and introduce yourself, in the intro forum, without promoting your business. Hang around and share your experiences. We will be glad to exchange knowledge with you, however, we are not your customers to be sold to. Hope you stick around and good luck.:cheers:

 

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[1mancrew]

It would be nice to hear updates on some of the post. With the banks pulling credit limits back, are they doing the same for the business credit also?
please update us.

Thanks
mike

 

[hatterasguy]

Say I incorporatean LLC this year, and at the end of next I want oh a $200k construction loan. (amount isn't important, but its not going to be more than that)

Say the lot is paid for in cash.

Could I bypass the no credit history of my company by having $50k-$80k worth of cash on hand? That should make the bank comfortable no?

Anyone have any experiance in this?

Here is an update for you:

I recently secured a $150k personal line of credit from a private investor. Fairly good terms. I showed him one of my deals, and he was very impressed by the margin, and my uncles business who I partner with at this time. Thats all it took, banged it out over dinner.

I already have the use of about $200k from another source, that I have been using. And I can probably get another $150k-$200k or so from my grandmother if I asked.

All these are LOC, from private individuals.

Right now I'm saving my cash and just doing deals with my uncle as a partner, and my LOC to fund my half.

 

[randallg99]

thought I'd resurrect this thread.... it's so applicable to my problems today:

I'm spoiled because I've been accustomed to using banks over the years that I've been in business. I have all fixed mortgages on my rental properties in the 5-6% range without points and commercial loan rates with terms to die for. Well, that's changed a bit.

My business took a hit and so did my net worth. Banks called in my loans and I've all but been written off for dead and recently I've been searching ways of achieving alternative forms of funding to expand my business. There are interesting and creative ways of obtaining money but I'm not willing to sell my body parts. Well, not yet anyway.

So, I've been talking with scumbags (oops, didn't meant to say that aloud). Been on the phone with hard lenders and money brokers who don't have a choice but to represent lenders with tight leashes and are in the midst of a serious dilemma: they have a lot of deflating cash but they can't lend unless collateral is 1.5:1; personal guarantees, PERSONAL credit FICO score and proof of previous success. It really has become a tight environment if you're seeking >1mm funding. Almost a nightmare.

My credit cards all have lines that were reduced by 50%+/- down to levels where they are now maxxed out which virtually killed my credit score overnight. It went from 700 to 660. Now that FICO is very important to lenders, it is imperative I somehow fix this.

Regarding fico score, I learned today (hopefully someone can verify this) that I can sign on as a co-borrower on someone elses' credit lines (credit cards, home line, etc) and share their credit lines even if I don't use the credit. Can someone at least verify this? any credit experts here?

 

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[MJ DeMarco]

The banks actually "called" your loans? I didn't think they did this unless in the rarest of circumstances.

 

[phlgirl]

I added my husband's name and ss# to a few of my credit cards, after a construction business of his caused his credit some trouble. It took some time but it was effective.

I will write more later - this tele keyboard is brutal.

 

[randallg99]

The banks actually "called" your loans? I didn't think they did this unless in the rarest of circumstances.

this happened a couple of years ago, but the short of the long story is that my company constituted approximately 3% of the banks entire exposure, or at a regulated 5:1 leverage, I was a threat to their tier-one levels.... my companies were already showing cracks when average balances in the depository accounts were falling short of their agreements. Combine this with housing industry, real estate and retail and I was ripe for being bent over in work-out. (I should have fought harder, but when banks are in a corner, they get downright nasty and were making life miserable)

end of the story is that I refi'd commercial property to get out of the bank. Since then, this bank closed more than half of their branches and their stock is in shambles. I always wondered if they worked with me instead of throwing me to the lions how it all would have turned out.... but you can't fix stupid.

 

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[randallg99]

and ... to finish: my loans all had re-sets after 5 year terms with rates of 5 yr treasury + 250 basis points. These were rates that I negotiated hard for and people even during the "loose money era" couldn't believe I achieved... this short spread gave the bank even more incentive to boot me.

so instead of "calling the loan" they simply wouldn't renew the loan at the 5 year mark and I would have been in default thus provoking clauses that would have blackballed my credit among the good ol' boys aka other local banks...

 

[andviv]

Sorry to hear about your problems... or should I say "inconveniences"?

Many credit card companies and banks are cutting lines to what you owe, effectively killing your credit score.

You could pay off a little bit of those balances to improve the numbers, but in my opinion that is not effective, your cash is more valuable in your hands, and nothing prevents them of cutting your line again if you pay more. So, again in my opinion, keep your cash available.

It is simply amazing that you are looking for money to expand your business these days, especially given the fact that you say your companies were showing cracks... I guess I'd be taking a different approach, so I commend you for your big cojones...

About the lines of credit... not sure if that is still effective. After the 2008 credit score changes done by the three bureaus that is not working the same. Problem is, I am not even sure if the three of them already implemented the changes (last time I heard, only one was calculating the score with the new formula). in any case, I don't think it would hurt you, but it may rise a concern for the bank and then also reduce that other person's line of credit. Please note this is pure speculation on my part, as I have not been as active with credit scores in the past year or so.

 

[randallg99]

Sorry to hear about your problems... or should I say "inconveniences"?

Many credit card companies and banks are cutting lines to what you owe, effectively killing your credit score.

You could pay off a little bit of those balances to improve the numbers, but in my opinion that is not effective, your cash is more valuable in your hands, and nothing prevents them of cutting your line again if you pay more. So, again in my opinion, keep your cash available.

It is simply amazing that you are looking for money to expand your business these days, especially given the fact that you say your companies were showing cracks... I guess I'd be taking a different approach, so I commend you for your big cojones...

About the lines of credit... not sure if that is still effective. After the 2008 credit score changes done by the three bureaus that is not working the same. Problem is, I am not even sure if the three of them already implemented the changes (last time I heard, only one was calculating the score with the new formula). in any case, I don't think it would hurt you, but it may rise a concern for the bank and then also reduce that other person's line of credit. Please note this is pure speculation on my part, as I have not been as active with credit scores in the past year or so.

In response-

1. thanks for they sympathy. This "inconvenience" is very real among millions of small businesses throughout the country. I just spoke with a caterer and a stationary comapny (both small mom&pops w/no employees) and their stories make mine look like peach pie

2. exactly right about the credit card dilemma. FICO score literally went down 30+ points in a matter of 2 months as a result of them diminishing the credit line right down to the open balances, consequentially maxing them out! I am especially concerned now that the score has dramatically dropped that gives the CC companies justification to shoot my rates sky high.

3. expanding in this environment is a matter of survival. hunkering down is effectively still losing me money in form of opportunity costs. Many of my competitors have gone out of business leaving a huge void in the marketplace. The plan is to be prepared for an "L" curved recovery within the next 18 months. If a "V" recovery comes, then great. If it's a "W" then we're better prepared.

4. the FICO scoring system is extremely concerning and I wonder how the other person's score will be affected.

Are there any other ideas on improving scores (besides paying off existing lines?)

 

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[phlgirl]

First, let me say that I am not up-to-date on any recent changes to calculation procedures, which have been implemented by the credit bureaus.

When we did this a few years ago, I did not notice any impact to my credit score. We had a 'credit expert', whom we paid, to ensure that the 'good news' was updated on my husband's credit report. Similar to how you would go after them for reporting inaccuracies, it is also your right to press them about reporting the GOOD points about your credit. So if you have any other lines, which are not on your reports or are not up-to-date, make sure you see to getting those vendors to report the Positive feedback.

The only other method I can think of, which tends to result in a few points per line item, is inquiries. With work, you can have some of these removed from your credit report.

If you want contact info, let me know, Randall. I will tell you up front that her communication skills are lacking but if you keep after her, she has a magical way of getting things done.

All that said, my credit score is rockin and I still can't get any new bank loans. I am on a new mission though.....2 meetings scheduled next week!

 

[andviv]

Bump, for a very valuable thread.

Any updates as of mid-2011 with current banking and lending standards?