XBanker

Why Incorporate?

February 29th, 2008

Every so often I need to step back and focus on the basics. I deal with corporations and limited liability companies (LLCs) every single day and for me it is an automatic slam dunk that Americans need to be incorporated.

But I need to remember that we are not taught in schools why we should be incorporated. And we’re certainly not born with it. So now and then it is important to step away from all the bylaws and agreements and strategy brainstorming and pose the question: Why incorporate and what are the benefits of incorporating your business?

The answer is threefold: Protection, Taxation, and Credit.

The first big reason to incorporate is to gain asset protection. As you probably know – doing business in your own name as a sole proprietorship (or worse yet, as a general partnership) offers no asset protection. One claim and everything you own – not only your business assets but your personal assets as well – are exposed.

Using corporations and LLCs can protect your personal assets from creditor claims. And provide you with peace of mind.

You can also use more than one entity for even greater protections. For example, if your business corporation gets sued a judgment creditor could reach inside the business. But what if the valuable assets – the equipment, the trademarks and the machinery – were in separate LLCs and leased back to the corporation?

The answer is that those assets are not owned by the corporation. They are beyond the creditor’s reach.

The right use of entities can also save you on taxes, particularly on payroll taxes. Work with a good CPA and you will see the savings immediately. And remember, sole proprietors are audited at a five times greater rate than corporations and LLCs. A good financial advisor can help you maximize the benefits of business taxation.

The third excellent reason to incorporate has to do with credit. Credit for your business can be obtained through a corporation or LLC separate and apart from your personal credit. Remember, as your business grows and your credit needs grow with it you will certainly hit the limits on your personal credit. You need to establish an independent business credit profile for your future success. A corporation or LLC is the best vehicle for carrying forward this important strategy.

Three important strategies – asset protection, tax minimization and credit enhancement – are the core reasons for why you should incorporate.

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Almost Famous!

February 26th, 2008

I’ve been invited to publish a series of posts on The XBroker blog relating to small business financing for professionals in the real estate and mortgage industries. Check out my first post: How To Maximize Your Income and Minimize Your Liability as a Real Estate Professional.

If you’ve never visited the XBroker blog, I highly recommend spending some time there. The XBroker’s advocacy of transparent mortgage rates is a thorn in the side of a banking and mortgage establishment that continually stings consumers with marked up interest rates and bogus fees.

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What Is The Difference Between A Term Loan And An Unsecured Line Of Credit?

February 26th, 2008

You will find that some banks offer two options to small business borrowers: term loans or unsecured lines of credit – it’s important to understand the difference between a term loans and unsecured lines of credit. The easiest way to think about an unsecured line of credit is to consider it as “access to capital.” If you get approved for a $50,000 line money doesn’t change hands, you simply have access to this money – you don’t pay any interest until you actually use it. With a term loan, you receive the money upfront and begin paying principle and interest for the term of the note.

My bias is towards unsecured lines of credit, because you can build a healthy reserve without increasing your monthly debt burden – until you actually use them. However, a term loan may make the most sense if you know that your cash flow will cover the payment and that you will immediately use every penny from the loan.

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Common Mistakes Made By Business Borrowers

February 22nd, 2008

Premature Application. This is probably one of the most frequently made mistakes by business owners. Applying for credit without taking the time to research options and not being relatively certain about chances for success is a costly mistake. Whether you’ve put off your hunt for financing until it has become an urgent issue, or if you’re acting on an impulse – don’t be careless with the application process – you’ve got one shot to get it right. With most banks, you can only apply once every six months – a denial can set you back for 6-12 months.

Interest Rate Haggling. When you are approved for financing, don’t get caught up in the rate that you’ve been given. For credit cards and business lines of credit, you’ll usually have a prime + 1-9 points (which is the prime interest rate plus additional interest rate, if this is new terminology). Your initial rate will be determined by the strength of your application and the banks lending guidelines. I’ve seen business owners foolishly turn down approved lines, because the rate was 1 or 2 points higher than they wanted. Unwise. Take whatever you’re given. Once you have your foot in the door at a bank you’ll be able to prove yourself. With a good track record getting a rate reduction or line increase is easy to do. I recommend calling every 6 months to request a rate reduction and line increase. The bottom line is to take the credit and be smart with it. Don’t spend it on activities that won’t produce a return greater than your rate. It’s that simple. Don’t get hung up on your initial approval amount either – for the same reason.

Don’t Explore Options. You need to make sure there is alignment with your financing goal and the lending option that you choose. Just as it would be foolish to purchase a home with credit cards, it’s just as crazy to use an unsecured line of credit to purchase equipment and property (unless you are just flipping them). You need to explore all your options. For instance, trade credit allows you to finance purchases from other businesses such as office supplies, equipment, courier services, printing, etc. Leasing, factoring and merchant account cash advances are all options that might best fit your current needs (I’ll address each of these options later). With a little homework and preparation you might just get the money you need under the best possible circumstances.

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The Credit Myth That Just Won’t Die…

February 21st, 2008

I’ve heard it so many times…”I pay my bills on time, I have excellent credit.” Yes, paying your bills on time is very important but – sorry – it does not guarantee excellent credit.

Your payment history is only about one-third of your credit score. Other factors such as your debt levels, new credit and the length of your credit history make up the other 65% of the credit you have been building.  Credit myths are everywhere, so so get caught in the hype.

It is entirely possible to pay all your bills on time and not have excellent credit.

And one sure score-killer is maxing out credit cards — even those credit cards you are using for your business.

If you must tap personal credit for your business, it’s essential that you choose business credit cards and loans that don’t report to your personal credit files. You may have to provide personal guarantees (PGs) and you may be subjected to personal credit checks, but don’t take on biz loans that will drop your scores.

Otherwise, your “excellent credit” may not be as hot as you think.

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