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Corporate
Credit
Once your corporation is established, the need for cash
flow arises.Let's suppose you just started your new business and went
to the bank to get a loan through the corporation, not personally because
of liability. Well, if
the corporation was just formed it has no credit history; no tax return,
no financials and you will get NO money for the corporation. The bank
may loan the corporation money if you give a personal guarantee. That
means, the bank knows the corporation doesn’t have a credit history,
so, it will only loan the corporation money based upon you having excellent
personal credit and giving a guarantee personally, that if the corporation
doesn’t make it then you personally will pay the loan off. How
does than sound? Probably not very good. Is there a way to get around
personal guarantees? Yes there is! We will cover that a little bit later
on.
What if your personal credit is less than satisfactory?
Well, that is one way not to worry about the personal guarantees, because
you will not get a loan! Then the goal would be to establish corporate
credit and obtain the loan through the merits of the corporation’s
credit without personal guarantees! That is the basis of this section.
Anytime a corporation applies for a loan or fills out
an application, a certain amount of corporate privacy will be lost.
Meaning, if the corporation has enough money and access to money, and
privacy is important to the corporation, then there is probably no reason
to go through the process to establish corporate credit. What if you
are in a position where you need corporate privacy and a credit rating
to borrow money, what do you do? The answer is to have one corporation
that goes through the credit process. It does everything to obtain the
highest credit rating possible so that when it needs to borrow $25,000,
it can. That corporation will lose some of its privacy in this process.
Now, another corporation or several others, are involved in transactions
and keeping your business affairs as private as possible. They can even
borrow money from the main corporation that has gone through the process
to establish an excellent credit rating. This will accomplish the best
of both worlds.
You may be familiar with the personal credit bureaus;
Experian, Equifax and TransUnion. These are the agencies to which you would
go in order to obtain a personal credit file on yourself. You may be
very surprised at the mistakes in these files and we suggest obtaining
a report for your information. It is also recommended to take the steps
to clean up your personal credit history.
Other Tips to Establishing Corporate
Credit:
1. Obtain an American Express corporate credit card.
Here is the telephone number to apply over the telephone 1-800-433-3550
(if the corporation has less then 10 employees). You can also have them
mail you an application. You can fax in an application, since they require
an original signature on the application, they will send you a signature
card (similar to a bank account) to mail in also. The fee is $55 per
card for the American Express card or you can obtain the Optima card,
which works like a regular Visa/Master card and has an interest rate
and the corporation is not required to pay the balance off each month.
There is no fee for the Optima Corporate Card, although it doesn't have
some of the corporate benefits that the regular corporate credit card
offers. Obviously, the corporation will establish a higher credit rating
faster with the regular American card over the Optima card. Here are
the questions they will ask:
a. You must be the owner or an officer of the corporation
to apply.
b. The physical address of the corporation.
c. The phone number of the corporation.
d. The name of the individual responsible personally
for the account. Yes, you have to give your SSN. Basically, this is
a personal guarantee to American Express.
e. Credit references. This means the corporate bank
account; any corporate trade references (NCP office package payments).
If the corporation is brand new and has none of these you will have
to give personal credit references. If that is no good, then you will
have to wait a few months until you establish some corporate references.
The credit limit will be based on the credit history
of the company or individual. Usually, American Express will start you
out at $1000 limit. Each month that you pay off your balance on time
you will get up to a 10% increase in the amount of credit. It will take
about 10-15 days to receive the card (if at the corporate address, we
can forward it to you).
2. Obtaining a bank loan. Unfortunately there is
no easy way to obtain a bank loan. The bottom line is no matter
the situation the bank is going to require a personal guarantee. So,
if your personal credit is poor you will have a difficult time obtaining
a loan from the bank for the corporation. Here are the requirements
for obtaining a loan for your corporation through Bank of America (This
is for a loan up to $50,000).
a. The corporation must have been in business for 2
years and profitable.
b. Must give a personal guarantee.
c. Give them the gross sales of the corporation.
d. No Corporate or personal financials are required
(if you are asking over $50,000 for the corporation then financial statements
will be required).
e. If the corporation has been in business less than
2 years or not profitable, then you can still apply for a corporate
loan, but the bank will heavily rely on personal guarantees.
3. Many of the other options require your corporation
to have been in business for over a year, i.e., Office Max or Office
Depot. With a new corporation this is impossible, unless you had
a shelf corporation that has been in existence for over a year.
Personal Guarantees for the Corporation
Earlier, we spoke about obtaining corporate credit by
giving personal guarantees. We covered some areas to accomplish your
credit objectives if your personal credit was poor. What if you have
excellent personal credit and you would like to get around personal
guarantees, use it if you have to get started in the right direction?
The goal here is your ability to negotiate and use common sense. guarantees.
But with other credits you can. Consider these possible remedies;
1. Have the corporation offer alternative collateral
instead of the personal guarantee. Convince your supplier or vendor
to accept a security interest on assets of the business instead. Or
maybe it can accept a guarantee from an affiliated corporation.
2. Remember, find a creditor that wants your business.
If you show them some cash up front they may be more than willing to
forego the personal guarantee, and, if they won’t, their competitor
might.
3. Maybe you can only get half the credit line without
a personal guarantee. Instead of $10,000 maybe you can only get $5,000
to start.
4. Ask the creditor if he would be willing to drop the
personal guarantee if you paid on time for the first 6 months. The name
of the game is to negotiate.
Remember if you have an existing relationship with
a creditor and the corporation is unable to pay its bills on time, never
give the creditor a personal guarantee at that point no matter how much
they insist on one. If you have to sign the personal guarantee make
sure your partners signs also.
The goal is to avoid personal guarantees as much as possible
and to pay off those debts first that have the personal guarantees.
How to Keep Your Business in the Top 5%!