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!

This dynamic duo built Corporate Credit Concepts from the ground up, establishing themselves as the premier provider of cash credit solutions for entrepreneurs. We have formed a strategic alliance to integrate our consulting solutions into a combined offering: Business Credit Success. Through this partnership, we will be able to help our clients obtain thousands of dollars in cash credit without personal guarantees - regardless of the business owner’s personal credit.

Stay tuned as this relationship develops and other key acquisitions are made. In the meantime, enjoy the great content these two experts will contribute to the blog and to the business.

Let’s say you are raising $250k from investors to start your business, if the business is only worth $500k, the investors will own 50% of it; if the business is worth $1m, they’ll only get 25%. The higher the valuation, the greater the percentage of your business that you’ll retain. It can be challenging to justify your valuation without revenue - which is where promising entrepreneurs routinely get taken to the cleaners. This is why I typically recommend convertible debt to raising hard equity, and why I recommend obtaining debt financing in the early stages of your business.

First of all, most business won’t raise a dime in outside capital. Investment networks are flooded with hopefuls that burn time and money trying to raise money - not recognizing the complete tooling they will receive in the event that someone actually believes their concept has merit and wants to invest. It is a lot easier to attract capital, and to do so on your terms, if you have successfully proven the concept and have some traction.

Unless you’re building airplanes, you can probably get things moving with less than $100k. This is why the XBanker is an important asset in the Shared Success family - we are here to help entrepreneurs establish a strong foundation, nailing the fundamentals and obtaining “seed credit” so they can get things moving. So if you are still slumming on the investment networks and forking over gobs of money for a business plan that no one will read (and if they read it - they sure won’t believe it!) - stop. Let us help you get your first $200k, so you can bring on investors under the right conditions.

Garrett Sutton’s book, The ABC’s of Getting Out of Debt, makes a cameo during a scene of the movie: Wanted.

The word on the street is that the movie is pretty lame - I guess the trailer is better than the flick (so you can see it here and save yourself some money). I imagine there will be some fatalities from kids trying to “bend” bullets (watch the trailer to see). On the other hand, Garrett’s book has received very positive reviews and no one has been fatally injured practicing anything in the book!

My first experience was a discussion with a consultant to a portfolio of companies in various stages of their business - all with immediate capital needs. We were exploring potential solutions for these people. Most simply needed $50-100k to purchase inventory or to invest in new opportunities - getting the money is critical to their success. Yet, as I started asking questions, I was being shot down with every possible financing option. It was apparent that these business owners were looking for $100k for 2-3 years at less than 5% interest with no colateral and no personal guarantee and they wanted it now, despite their less than stellar credit.

The second encounter was with a start-up that has just been exploding out of the gates, but with growth comes greater demands on cash flow.  Nevertheless, they needed a short-term, hard money loan. They were willing to pay 35% on the money for 5 days (that was their offer). What they failed to understand is that a lot of interest without collateral doens’t reduce the risk of a transaction. They initially balked at the collateral demands, but realized after some shopping that no one cares about how much future return they may get, if they feel that there is a big chance that they’ll lose their entire investment!

The final experience was a conversation with my neighbor, who is just about to land a couple huge distribution channels for his product. He called me minutes after he realized that he was going to need to figure out how to finance the inventory (FYI - your big retailers will want 60 day terms). We went through a handful of possibilities and he soon realized that he wasn’t facing the crisis that he thought he was. My advice to him was to start thinking about his hurdle rate.

I really didn’t pay much attention in my finance classes in business school, but I do remember the concept of a hurdle rate. Your hurdle rate is the minimum rate of return that you expect from a particular initiative. There are a number of ways to calculate this, but I’ll keep it simple: think of your hurdle rate as the return you could get elsewhere (an opportunity cost) or what your money costs you (your cost of capital). For instance, if I can get a 10% return by investing in the stock market, I should expect a 10% return or more from a comparable risky investment in my own business - so I might use 10% as the hurdle rate that every business investment needs to surpass. Another way to approach it, is if my bank line of credit has a 15% interest rate over a 1 year period, then 15% will be my hurdle or my cost of capital. As I analyze the return from a particular investment or expenditure, it better clear that hurdle.

This really isn’t rocket science (if an MBA can learn, anyone can :-), but it is an important concept. Rather than getting caught up in what interest rate you have, you need to be focusing on what return you can anticipate from that money. I want to pull my hair out when a business owner turns down an unsecured line of credit because the interest rate is too high (you only pay on what you use!). Don’t allow yourself to get caught up in the lowest rate game. Work to get qualified for the best possible rates you can, then turn your focus on making sound investments in your business that will produce a superior return - investments that will clear your hurdle. At the end of the day, it isn’t what you pay for capital that matters, it is what you can do with it!

Business owners are routinely tooled by the government. We are easy prey. We are too busy creating value to show-up at protests. We have better things to do. Which is why politicians typically cater to the unproductive (welfarees) or unproducing (retirees & students). I typically avoid these issues, but I think it is only fair to surface items that I think may impact you. So I’ve decided to start a new series to call-out politicians and bureaucrats that vilify, target or hurt small business owners. Don’t worry, I’m not some partisan hack. I trust politicians about as far as I can throw them, regardless of party.

Yesterday, I stumbled across a story in the Wall Street Journal about a proposed new bill in the Senate that I think we all should be concerned about. The Senate is proposing a bill that will require credit card companies to report business owner credit card spending data to the IRS. Why does the IRS need to see what your business spends at Kinkos next month? They hope to use this data to nab business owners who under-report their income. They hope to confiscate an additional $9.8 Billion from small business owners with this move. The money is already earmarked to further enrich and bail out the banking industry. This seems like a good trade for a politician - they criminalize small business owners so they can line the pockets of the mortgage companies that gave them sweetheart deals on their personal mortgages.

Don’t get me wrong, I’m not advocating the under-reporting of income – but this whole thing seems creepy to me. Why should a business owner be called out separately from the average Joe? I think civil libertarians would go nuts if the IRS was pulling this on every American - especially since the objective is to increase audits of individuals, but you probably won’t hear much about this one. Business owners are easy to vilify and have few champions. Oh well, who is John Galt?

Regardless of the actions of the Senate, you need to make sure that you separate your personal life from your business as much as possible. Co-mingling expenses is a fast-track to losing your corporate veil and exposing all your personal assets to litigation. You need to build business credit that you can maintain separately and to make sure that you are making legitimate business expenses.

Feel free to drop a line to the champions of this bill and let them know how you feel about it: Sen. Max Baucus (D., Mont.) & Charles Grassley (R., Iowa).

In the Finance Traps report, I discuss the concept of YSP or Yield Spread Premium. Whenever you have a brokerage model, one where an independent broker is packaging a loan or lease with a particular bank, you will encounter YSP. Banks will tell a broker what rate you qualify for, and if you elect to have a higher rate, the banks pay the broker more commissions on the loan. This rebate is called YSP. It was designed to help pay closing costs - so rather than pay your closing costs, you can take a slightly higher interest rate and use that rebate at closing. Unfortunately, most brokers don’t explain or even disclose YSP. Instead, they markup the rates that they show you - pocketing over $3 billion in YSP rebates each year. This gravy train just got derailed.

RateSpeed will do for mortgages what Travelocity did for travel. The mortgage finance world is about to change, as is expected when you offer consumers transparent pricing and access to once-privileged data. With RateSpeed you can enter your loan information, anonymously, and pull completely transparent mortgage rates. You can see exactly how much YSP you can use to offset your closing costs, and all the loan data that your broker sees. Progressive mortgage professionals will flock to RateSpeed, some out of necessity, others out of a desire to offer flat-fee mortgages, transparently. Go to www.ratespeed.com and search mortgage rates today.

Most people don’t start looking for capital for their business until it is too late. “Too late” can mean a lot of things: damaged credit, out-of-line ratios, too short of a time frame, etc. These oversights, plus the procrastinator’s itch for a quick fix, are two of the most common ailments we deal with. I wish every entrepreneur understood this truth: accessing capital is a process.

First, you start by setting up the right corporate structure. You need a corporation or LLC. Garrett was talking about the benefits of S Corporations, when to use a C Corporation, and the advantages of an LLC. To access capital under the best terms, you need to separate yourself from the business as much as possible. Having a corporation or LLC is a step you cannot afford to skip.

Once you have a corporation, you need to build a business credit profile. Building business credit is a process too many entrepreneurs want to skip or are so busy that they don’t have the time to dedicate to it. But, you need to find a way to establish a business credit score. In the past, banks relied exclusively on personal credit to approve business loans, business credit cards and unsecured lines of credit. The recent credit crunch is changing all of that. We are seeing business credit becoming a factor in most applications now. Even if the business credit score isn’t used, building business credit will help ensure your business is compliant with the numerous legitimacy checks that banks and vendors will use before granting credit. It’s unfortunate to see business owners skip this critical step.

With a business entity and a business credit profile in place, you’re now ready to start acquiring a mix of financing products. Every business owner needs a couple of business credit cards (a form of cash credit). The right business credit card will give you working capital that won’t report your balances on your personal credit report - this is key to keeping your credit ratios in line for future financing.

It is also important to start accessing vendor credit. Just about everything manufactured or sold by a business can be obtained with business credit. Vendor credit comes in many forms, with net terms (30-90 days to pay invoices) and revolving lines being the most popular. You need to get in the habit of preserving your cash and your cash credit.

Once you have a good mix of cash and vendor credit you’ll be better prepared for bank financing: loans, unsecured lines of credit, and equipment leases. You’ll be prepared because you’ll have strong business credit - multiple lines with a positive payment history and with sufficiently high credit - to warrant larger loan limits from the banks.

If you follow the process, you’ll be rewarded; if you wait until the last minute, you’ll get what you deserve.

Gerri, our resident business credit eXpert, was quoted today in the Wall Street Journal in a small business financing article: Pick The Right Credit Card For Your Business. Of course I’m biased, but I think Gerri’s insight was the most important in the entire article:

“Business owners should use credit cards that report to business credit agencies, such as Dun & Bradstreet or Experian’s business bureau, instead of the personal-credit bureaus. Reason being, you don’t want the business’s financial woes or big expenses to ding your personal credit rating.”

Rewards are great (personally, I’m a total points addict); however, the most important part of a business credit card is the ghost guarantee that they provide you as a business owner - which can serve to protect your personal credit from being dragged down by your business activities. I gave my two cents on the subject in a previous post regarding the importance of business credit cards.

Every day we help clients find the right business credit card; preferably one that reports to the bureaus and we help them prepare to qualify. The worst mistake you can make is to aimlessly apply to credit cards when you don’t know in advance that you have a strong chance of being approved.

Thanks for a great contribution on the topic, Gerri.

For better or for worse, the truth is that the industry you are in will play a fundamental role in the bank’s decision on whether to lend you money.

Each bank makes their own decision on which industries they “prefer” to lend to, which ones are a little “higher risk” and those that are “restricted”. Even though every bank writes their own rules, there are some generally accepted industry guidelines you should be aware of. The intent of this post is to explore these guidelines, and why banks make these distinctions.

The most basic principle of lending is that more approvals are a direct correlation to lower perceived risk. The more you have invested in your business, the less likely you will be to give up on that dream. Banks like to see you heavily invested! If there’s a discernable chance you will give up on your business in 2 months, your chances of getting some bank to lend you money is slim to none. If the bank determines that it is likely you will give your life for your business and do whatever it takes to make it succeed, then your chances of getting money increase. But what does this have to do with industry?

All banks have identified industries that they “prefer” to lend money to. These preferred industries are perceived to be lower risk. Most of these industries are professionals like Doctors, Dentists, Accountants, Attorneys, etc; people who have earned licenses and/or have gone to school for an insane number of years in order to pursue their business. If I had just graduated from college after 8 years of studying to be a dentist, what are my chances of quitting 2 months after I open my practice? Of course it’s possible, but it’s highly unlikely. Banks employ the same mindset. Generally, professionals have so much of themselves invested in their company, (time, money, etc), that they won’t give up when they hit their first obstacle. The nature of entrepreneurship is that we will inevitably have hard times; the chances of us and others in our industry sticking it out will ultimately determine what risk category the banks place us in.

Some “high risk” industries include Consultants, Investors, Real Estate Professionals, Financial related companies, etc. What does it take to be an investor or a consultant? The answer to that is absolutely nothing. It really doesn’t require one day of schooling or one penny (in most cases) to carry around a business card that says “Consultant”. Lenders understand this and that’s why these types of industries fall into the “high-risk” bucket. This doesn’t mean that banks won’t lend money to this group, because they dish out money every day to these industries - it simply means that the underwriting guidelines will be raised a bit from the “preferred” level. Instead of requiring 2 years in business for a preferred industry, the same bank might require 3 years. Or maybe the credit requirements will be 20-50 points higher. If you find yourself in the “high-risk” category, all hope is not lost; you just need to be a little more prepared before you ask the bank for money.

Each industry category could have hundreds of different types of businesses. I’ve given you only a few examples here to illustrate that not all industries are equal in the eyes of lenders.

Tip of the Day: You need to understand which industry bucket you fall into BEFORE you ask the bank for money. The steps you will take to get prepared for your loan or unsecured line of credit will be different depending on how risky your industry is. Remember, if you are declined for financing, you are basically shutting the doors to that particular lender for about 6 months. It’s better to take a few weeks or even a few months to make sure you are ready before the door closes.

So, how risky does your industry make you look?