XBanker

Credit building loophole…or sinkhole?

May 14th, 2008

An entrepreneur invents a “creative” credit building strategy: will it work?

A business owner asks us: “I want to build business credit. My idea is to set up two companies, have one lend money to the other, and build credit that way. Will it work?”

Our answer:

The short answer — don’t do it.

The long answer — it’s not as easy as it sounds.

First, you will have to report the loan to Experian and/or D&B. This is not as simple as calling them and telling them you have an account you want to report. Your company will have to be approved to report, and that means going through an application and review process first. If the company that wants to report is new, it will have to establish its own business credit before it can report. You may also have to undergo a site visit, and/or reference checks. Generally, a company must have at least 500 customer files before it can report to Experian, and D&B will require a smaller company to become a subscriber before it can report.

Secondly, one loan will not make that much of a difference. Each reference helps, but a single one will not make or break your credit history. You will still need to establish additional references.

Third, the credit agencies will request information on the principal of each business. If you are the owner or co-owner of both, that information will be cross referenced.

And that leads to the big problem here: This whole arrangement can easily be considered fraudulent. Loan fraud has been a huge problem lately and lenders are being especially careful. If the credit agencies don’t flag this one as risky, a lender may catch it.

If you think building business credit is tough now, jut wait until your file has been flagged as “high risk” by the commercial credit agencies.

There are easier, more legitimate ways to build business credit. Give them a try first.

Posted by The XBanker | Currently 2 Comments »

Accounts Receivable Financing

May 13th, 2008

Accounts Receivable (“AR”) Financing is often confused with Accounts Receivable Factoring. Contrary to what some are professing on the web, these are two very different financing options. If you need a review of Factoring, read my post: How Factoring Can Benefit Your Business.

Accounts Receivable Financing consists of only 2 parties: the business owner and the lender (remember: AR Factoring involves 3). An “accounts receivable” is money that is owed to the business. Most businesses will have multiple accounts that are being paid on at any given time. An invoice is the usual method provided to advise customers of the amount they owe a company. All such AR invoices issued to customers are shown as an asset on the business balance sheet. The more assets you have, the less risky you are in the eyes of lenders: Banks love assets.

Not all assets are created equally though. Some assets depreciate (decrease in value) and some appreciate (increase in value). Some can be converted into cash rather quickly and others take a long time to become liquid. Accounts Receivables are usually viewed as good assets because most translate into cash relatively fast; typically in 90 days or less.

When a bank issues a loan to your company, secured by your AR, they don’t pick a certain number of your invoices and stake their claim on those specific ones. They are interested in the performance of your entire portfolio, the change in volume over the past few months and your collections history. If you can document, using your financial statements, that you have $XX,XXX as AR and your customers typically pay on time, you might be able to secure a bank loan or line of credit for 50% to 80% of “X.”

Again, this is different than factoring because you are still responsible for collecting on the invoices. It’s business as usual for you; now you just have a little working capital to go with it.

Posted by The XBanker | Currently 1 Comment »

Business Financing For Those With Bad Personal Credit

April 24th, 2008

The harsh reality for most business owners is that they can’t escape their personal credit. With the rise of the McBanks, business lending (particularly for loan amounts under $100,000) have become auto-scored and personal credit driven. This is what we lovingly refer to as the Bank Lending Matrix. In this system, you either fit the mold or not. It is even tighter these days due to the mortgage melt-down and irresponsibility of lenders and consumers.So if you have poor personal credit (by bank standards that means a score under 670) you need to forget about bank small business loans until you get your score up. If you need the cash now, you may need to consider bringing on a partner with good personal credit or trying to raise money from investors.I’d prefer to see you get the money you need without giving up equity. So, depending on your borrowing needs and the status of your business, here are some potential solutions for you:

• Peer-to-Peer Lending
• Factoring
• Accounts Receivable Financing
• Equipment Leasing
• Trade Credit

You may just find that you can get all the money you need from one or more of these solutions. Feel free to speak with one of our associates if you have any questions or need help with one of these solutions.

Posted by The XBanker | Currently 5 Comments »

Social Lending or Peer-to-Peer Lending

April 21st, 2008

Here’s the truth: lenders care about risk – and so should they. Underwriting guidelines are 100% based on the principle of risk avoidance. It’s simple: the less risky you are perceived to be, the better your chances are of getting approved. The unfortunate truth is that with most banks, your “story” doesn’t play a part in the risk equation. You could be extremely gifted, passionate about your business, intelligent, and a proven winner in past ventures, but, unfortunately, non-tangible factors rarely help your case.

The Bank Lending Matrix doesn’t accept intangibles as data inputs, so these intangibles are neutralized at the banks.The only way to overcome this is to get your “numbers” in order. This means to take care of your personal and business credit score, build your business, create legitimate revenues, and wait until you have 1-2 years of history before you ask the bank for money.Waiting isn’t ideal for most entrepreneurs, since they need the money to get started.

A new and viable financing option is something referred to as social lending, community lending or peer-to-peer lending. Some of the most well know are Lending Club, Prosper, Zopa and Virgin Money (formally known as Circle Lending). With the exception of Virgin Money, these social sites are online platforms that allow a prospective borrower to tell his or her “story” when seeking a loan. If someone in the community likes what you say, they may choose to lend you money.Here’s an example, let’s assume you want to borrow $5,000. You don’t actually have to convince one person in the community to lend you the full amount – you just need to persuade 100 people to lend you $50 each (for instance).

Using Prosper as an example, Prosper takes the $50 from each of the 100 lenders (average Joes, not big banks) and issue you (the borrower) one loan. You only have to make one payment each month to Prosper. They manage the payment process and distribute the money to the 100 people. It really doesn’t get much easier than this!

I like this lending option, because the underwriting is not automatic and intangibles definitely play a factor in the decision to lend money. Just because your not dealing with the matrix, doesn’t mean that you get to take advantage of a bunch of pushovers – you might find that your peers are even more risk adverse than the banks! Nevertheless, social lending is a great alternative to the banking industry and might be a viable avenue for getting capital for your business.

Posted by The XBanker | Currently 6 Comments »

How Equipment Leasing Can Benefit Your Business

April 16th, 2008

One of the biggest mistakes that I’ve seen entrepreneurs make is to confuse capital and cash. Confusing the two can lead to wasting valuable cash and limiting your business’s potential. I’m a huge believer in using a mix of capital including loans & lines of credit, trade credit, and equipment leasing.

When it comes to financing your business, the name of the game is preserving your cash and limiting your personal exposure. I’m surprised at how many people come to us seeking cash to purchase equipment, vehicles, or machinery for their business. If you have access to cash, the last think you want to do is spend it on equipment. Cash is king, and without it a company can not operate and pay its bills. Just about any piece of equipment can be leased (most of the time with little or no money down!). In most cases, it is the equipment that generates revenue for the business – so the equipment literally pays for itself. All the while, you are still holding your cash and enjoying the tax benefit associated with the lease.

Another advantage to leasing is that it is much easier to obtain approvals than with a bank small business loan or line of credit – because there is a secured asset involved. This also leads to more lenient approval criteria, which means you don’t need perfect personal credit to qualify. In fact, if you’ve properly built your personal credit, you can obtain corporation-only leases with no personal guarantees! There is also a lot of flexibility in payment terms and buyout options. Take advantage of this by customizing the lease to best match your situation and business needs. The process is quick, usually consisting of a one page application and a fast turnaround.

As you consider the capital requirements for your business, keep leasing in mind. Not only can you save money, but you can preserve precious cash for growing your business.

Posted by The XBanker | Currently 2 Comments »