The XBanker
Business Financing eXpert
Credit Investors: Partnering For Personal Credit
July 18th, 2008
Like it or not, your personal credit will open or shut doors for financing your business. If you have terrible personal credit, we can help you obtain trade credit, credit cards, equipment leasing and potentially some bank financing. However, we can obtain much more financing, if a business owner has great credit (preferably 700+ FICO). This has important consequences for you, if you are trying to finance a business and have poor personal credit. You need to consider bringing on a credit investor or partner that can help you obtain bank financing for your business.
Last week, I asked an entrepreneur about his loan readiness and he told me his credit was in the toilet. So I turned to his partner, “My credit is even worse,” was his reply. I guess when it came to selecting partners, this criteria slipped their minds - don’t make the same mistake. Unless a partner brings irreplaceable technical expertise, they can always be replaced with someone that brings skills and credit to the table.
If you’re an entrepreneur with poor personal credit, you should consider bringing on a credit investor or partner. Ideally, you’ll need someone with 700+ FICO scores and good ratios (feel free to ask one of our consultants to do an analysis of a potential partner before you tie the knot). You may have better luck finding an investor or partner with good credit, than finding one with cash.
Credit investing is investing - rather than risking savings, they are risking their credit and guaranteeing the businesses debt (one could argue that this is an even greater commitment than cash). Keep in mind that this type of investor is bearing the financial risk for your business and should have a commiserate equity stake for that risk.
Business credit cards (the cards that require a personal guarantee) typically don’t care what percentage of the business your credit investor owns; however, banks will be much more particular. When applying for bank lines of credit, banks typically want to see 80% of the ownership on the application.
I’m sure your first reaction is: “I don’t want to give away 80% of my company!” First of all, I don’t blame you - but consider the value of owning 100% of a under-capitalized and failing business. Now, there are intelligent ways to provide coverage and upside for your investor - while preserving your ownership interest. The risk to the credit investor is typically short-lived, until the business can pay-off the debts and stand on its own two legs. I recommend structuring an agreement that protects your control of the business and provides for an option or claw-back of a predetermined percentage of the business. For instance, you may exchange an investor 80% of the business, but agree that once the debt is settled and the business is profitable that you can exercise an option for 60% for $5,000. This gives the investor an ongoing 20% interest for providing you with much needed capital and keeps you from unnecessary dilution (I just made up these numbers – so take them with a grain of salt). Of course, you should seek professional legal advise before implementing any of this – I’m just trying to expand your thinking!
A credit investor might be exactly what your business needs - so choose your partners wisely!
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August 9th, 2008 at 12:53 pm
I have a good idea for a business,but my personal credit is so bad i cannot get a loan from anywhere.
I have researched my market,i have a small business to rent so chan have it there,but no money to start-up.
This venture is a good one,a one and only type of business in the area. There are similar clubs in the area, but my expertise will be totally different.
I would love to have my own building,with the sq.ft. so i will not have to move.
I have had other clubs but could never open one with everything i needed to operate and cut down on expenses.
This club will have everything i need to operate and not worry about extra expenses.
I will not have to depend on some one else’s equipment.
how can i do this without any place to secure a loan.