In [my book] The Art of the Deal I warned readers to never personally guarantee anything. - Donald Trump, How to Get Rich, page 7
Personal Credit
Since this is a manual on Corporate Credit I will assume that you know the basics on personal credit so we will not go too deep into detail on this subject.
Fico scores range from 300-850 with 300 being the lowest and 850 being the highest.
Your credit score is based on five major things in your credit history: 35%- Payment history
30%- Amount you owe 15%- Length of credit 10%- Types of credit 10%- New credit Payment History
Your payment history is the frequency and amount you've paid on past debts. In the event that a debt has been sent to collections it will stay on the record for 7 years. If you have a debt that has been in collections for 5 or so years (so it’s almost to the 7 year mark) do not just pay it off, because once you pay you will have “paid collections” on your record for another 7 years. Instead, call the collections company and tell them you fully intend to pay the debt if they will write a letter to each repository (company that does credit reports -- there are 3) telling them to expunge the collection once you have paid. With their affirmative answer, pay it! You have their word that it will not be on your credit report.
The amount you currently owe for your credit cards, mortgage, car, etc. is on your credit history. This can be good or bad, depending on how much you owe compared to the limit you have.
My advice to you is to not max out your credit cards! Your credit report is based on the amount you owe on your credit card compared to the credit limit.
If your amount owed/credit limit is 0-30%: green light, 30-60%: yellow light, 60- 90%: red light. Your credit score will be higher if you have three cards in the green light range as opposed to one card that is in the red light range.
Hint: Mortgages are on your credit report. If you have many loans you don’t want to continually go to the same bank. Your mortgage broker will help you (he gets paid if you get your loan). Be up front with your mortgage broker about your loans so he can shop at different banks. If he doesn’t know where your other loans are he might try to get you a loan at a bank where you already have a loan and they could deny you.
Length of Credit
The length of time you have established credit is important. The sooner you get started building your credit, the longer you will have to create a high credit score. Get credit history started young! Buy things on your children’s' credit so they have some established when then need it.
Types of Credit
There are different types of credit. Mortgages are good (unless you have a lot of them). Some credit cards are good and some are not.
Don’t open department store cards – cancel them. Lowes and Home Depot are okay because they will be beneficial to you.
Note: If you only have dept store cards, don’t cancel them because you need some form of credit history. Work on opening a new card (see possible good cards below) then cancel your department store cards.
New Credit
Getting new credit cards, cars, etc. can hurt your credit score because your credit is checked each time you apply for something new. Sometimes when your credit is checked it lowers your credit score.
There are hard-hit and soft-hit credit pulls. A hard-hit credit pull is not good. This is when you have a mortgage broker, car dealer, etc. pull your credit -- it lowers your credit score every time you do! A soft-hit credit pull is okay. This is when you pull your own credit. You can do this as much as you’d like.
How Is the Personal Credit of the Officers, Directors, & Owners of the corporation?
One area of your business you should be aware of when establishing Corporate Credit, is the damage an individual with a challenged fico can have on the process. If an individual was associated with another company that has filed bankruptcy or has a high risk credit status, and is now an officer of your corporation, he/she could potentially damage your corporation’s Corporate Credit rating.
For example, if John Doe is listed as a Director and/or Officer on your corporation’s Officer’s List, but he was previously an officer of another corporation that received a "high risk" status from the credit bureaus, these credit bureaus could then tag the "high risk" status on your company. Unfortunately there are currently no laws protecting small businesses from the credit bureaus. Make sure all the officer’s of your corporation have a fico score of 680 or better and are free of association with any company with a "high-risk" status.
Though it is true you can obtain Loans and leases under your company with no personal guarantees, your personal credit plays a very important role when establishing Corporate Credit. In the early stages of establishing Corporate Credit you will be asked by banks and lending institutions to provide a personal guarantee on almost every occasion. Even after you have established a Duns Rating and a Paydex score of 80 or better, banks and lending institutions still want to see the personal credit of any officer of the corporation who owns anywhere from 10-25% or more of the business. Why? Because a person’s credit tells a lot about a person’s character, how you run your personal life is a pretty good indicator on
how you run your business. Banks usually look for a Fico score of 680 or better. Now this does not mean if you do not have a 680 you cannot get financing, it just makes your chances for getting approved a lot higher, interest rates lower etc. if you have good personal credit. If you, any shareholders, or any other officers of the corporation do not have at least a 680 Fico, you can apply the same strategies I provided in the finding a financial partner section in the seven steps chapter to find a credit worthy officer for the corporation.
Here are a few ads you can run:
Credit Worth Officer’s (CFO’s)
Not only will creditors check the personal credit of any officer who owns more than 20% but in most cases they will want the officer’s to provide a personal guarantee as well. To avoid this create a resolution for the Credit worthy officers of the corporation to control up to 100% of stock. With the words control up to 100% being used in the resolution this allows multiple credit worthy officers (CFO’s) to simultaneously state that they control up to 100% of the corporation’s stock while applying apply for credit on the corporation’s behalf. You can have as many credit worthy officers (CFO’s) as you want as long as you elect them to the financing committee. If you are issuing stock certificates to the CWO which you should, make sure that you put an expiration date on the stock certificate (60-90 day timeframe). This way you won’t have to worry about any problems with getting those shares back from the CWO. Not to mention you don’t want to own the stock for too long because it’s ok to own stock as long as you’re not sued while you own it, and you never know when a lawsuit may occur.
Creditworthy officer needed for local corporation
Excellent risk-to-return ratio. No cash or collateral needed.
Call (800) 000-0000
Overnight riches
No risk involved. Capital or assets needed for solid backer to yield large profits. Contact us at:
“The resolution should state we the board vote and elect that everyone named in the financing committee can state he/she controls up to 100% of stock (up to means 1-100%). They do not own the stock for a personal nature; they own the stock for credit purposes only.”
Bank Loan Procedure
These loans are not designed to put money in your pocket. They are designed to get banks to trust you and start loaning you money along with posting A-1 personal credit ratings on your credit report to show your credit worthy. The best credit reference you can furnish is a record of having borrowed money from a bank. Since bank loans are hard to get, a good reference will usually rate you as AAA-1 and open the doors to the credit world for you. The following is a technique for using the banks money to build an excellent credit rating.
First of all go to a bank of your choice. Make sure they report to the same credit bureau that you are building your credit file at. Open a regular savings account there for no less than $1,000. Wait 3 days for the account to be posted and then go back to the same bank and ask for a $1,000 loan offering your savings account as collateral. Since your loan is totally secured by your savings account the bank won't even make a credit or employment check. Take the $1,000 loan, go to another bank and do it all over again. Go to at least 3 banks doing the same thing. Ask for a 6 or 12 month payment plan for each loan and take your payment account passbook with you each time you ask for a loan because you'll have to surrender it to the bank in order to get the loan. After leaving the third bank you'll still have the $1,000 cash in hand. Now go to a fourth bank and open a checking account if you don't already have one. Wait two days, and then make one monthly payment on each bank loan from your new checking account. Wait a full week and send your second monthly payment to each bank. Repeat one week later with your third month's payment.
Once you've followed my plan you'll be eligible for signature loans, credit cards, home or auto financing, or anything else. A credit investigation at this point will list you as an excellent credit risk. And why not? Within 30 days you'll have an active checking account, three $1,000 savings accounts and three $1,000 loans on which you are three months ahead on payments. You'll also have great credit ratings on your credit report. And as you continue reading you'll see that you'll also have a fourth A-1 credit rating from the bank that will issue you your visa and/or Master card.
By making the first 3 payments you have unfrozen equal amounts of cash in your savings account. You can now withdraw enough money from your savings account to make your upcoming payments. Continue In this manner until the loan is paid off. You'll still retain most of your original $1,000 because it continues to draw interest while used as collateral. This helps offset the interest charges you pay. Try to keep a little money in each savings account for future references.
Personal Financial Statements
Depending on the lending institution, requesting a loan $50,000-$100,000 or more requires personal financial statements. A personal financial statement indicates your net worth. Each partner or shareholder owning a substantial percentage (for example, 10-20% or more) of the business should submit one. A personal financial statement is important to the lender, particularly if you have never received financing for your business before, because it gives the lender evidence of personal assets you could pledge to secure a loan.
What if I do not have personal financial statements?
If you do not have personal financial statements, then follow the strategies provided in the finding a financial partner section & the personal credit section.
To Personally Guarantee or Not to Personally Guarantee? That is the question
As I stated earlier in the beginning stages of establishing corporate credit, you will be asked 95% of the time to provide a personal guarantee. The other 5% if you’re lucky would be collateralized credit, credit that has collateral that can be reposed in the event that your corporation were to default on the loan. But once the corporation has established a track record with that creditor, a Duns rating, and a Paydex score of 80 or better it is possible to obtain business credit without a personal guarantee. Although most lending institutions will require most start up businesses to provide a personal guarantee, this does not mean that you have to be the personal guarantor.
Even if your FICO score is 850 let someone else personally guarantee the loans on the business's behalf. You get the best of both worlds, you give the bank their personal guarantor, and you do not have to be that guarantor. Besides you
wouldn't believe how many people get a kick out of being able to say that they are a listed officer of a corporation, or would be willing to be a credit worthy officer in exchange for profit.
No Personal Guarantee
Using personal credit to finance your business can cause problems. Because businesses require more cash to operate than consumers do, you may seem overextended. Your personal credit will not be portrayed accurately if you are using it to run your business. What if you have excellent personal credit but absolutely under no circumstances want to provide a personal guarantee? The Key factor here is your ability to negotiate and use common sense. 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 he can accept a guarantee from an affiliated corporation.
2. Maybe you can only get half the credit line without a personal guarantee instead of $50,000 maybe you can get $25,000 to start with.
3. Ask the creditor if they would be willing to drop the personal guarantee if you paid on time for the first six months. The key is to negotiate
4. Find a creditor that wants your business. If you show them some cash up front they may be more than willing to forgo the personal guarantee, and if they say they won't tell them their competitors will.
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. It is a good Idea to have a credit worthy officer for the corporation, someone to personally guarantee loans on the corporation’s behalf. But if you have to sign the personal guarantee make sure your business partners sign also. The goal is to avoid personal guarantees as much as possible and to pay those debts first that have the personal guarantees.
Creating a Credit worthy Officer • File a DBA under an AKA
• Establish credit with the assumed name (AKA) (If you currently have personal credit cards add your AKA as an authorized user to expedite the process of establishing credit with the AKA),
• Start establishing corporate credit with the assumed name as the personal guarantor. once you have been approved order an additional card in your name by adding yourself as an authorized user.
• If anonymity is not important to you then this strategy can also be applied incorporating your name.
Either way applying this strategy correctly will provide you with an endless supply of credit worthy officers that will personally guarantee loans on the corporation’s behalf. Thus providing a personal guarantee and avoiding a personal guarantee at the same time.
Separating the two
Though it is true you can expedite the process of building business credit through personally guaranteeing loans. Keep in mind when you personally guarantee a business loan, your tying your personal credit to your business debts. Businesses have needs in order to maintain the day-to-day business operations. They need materials, parts, equipment etc. on a continuous basis. And as it expands there's more and more need for capital.
Unfortunately with personal credit, the more you apply for financing for the business; you acquire more debt and more Inquiries. Making you undesirable to lending institutions because your score dropped and your debt ratio went up. This is why it is important to establish a corporate credit profile that is separate from your Personal credit.
As we discuss in the incorporating chapter you can separate your personal liability and protect your personal assets from that of the business just by incorporating. It is possible to build a business credit profile for a sole proprietorship or partnerships; however you are still responsible for all the debts of the business. I recommend building your business credit as a corporation. Because a corporation makes smaller companies seem larger in appearance. And the highest D&B ratings are reserved for larger corporations.