Blog
Credit Investors: Partnering For Personal Credit
July 18th, 2008
By The XBanker
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.
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Preventing Unnecessary Dilution
July 15th, 2008
By The XBanker
One of the biggest mistakes entrepreneurs make is that they give away too much of their business too soon. I’ve spoken with entrepreneurs that own less than 2% of their brainchild after diluting for “friends, family & fools” and for venture capital. You need to properly stage the financing of your business and to do so under the best circumstances possible to prevent unnecessary dilution.
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.
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You Know You’ve “Arrived” When…
July 10th, 2008
By The XBanker
…you make a cameo appearance in an Angelina Jolie movie.
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!
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What’s Your Hurdle Rate?
July 9th, 2008
By The XBanker
My mother always taught me that “beggars can’t be choosers” and my father preferred the “don’t be penny-wise, but pound foolish” – either expression is fitting for this topic. In the last week, I’ve had three experiences that made me think about being wise when you need money for your business and understanding the concept of a hurdle rate.
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.
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Government Screwing Small Business Owners, Part 1
June 25th, 2008
By The XBanker
It must be difficult living life as a politician; you have to pretend to look out for small businesses to win elections, while screwing them through acts of commission or omission the rest of the time. I usually try to ignore politics, I have better things to do – like creating jobs and making money (imagine that). Sometimes I get a bit upset when I hear a career politician talk about all the jobs they’ve created – as if they are the ones that father innovation and birth new ventures. Most of us would be on welfare if we ran our businesses like these clowns run the country.
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.
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Fast Cash For Your Business!
June 10th, 2008
By The XBanker
Do you need fast cash for your business? Want a small business loan with no personal guarantee? Are you looking for immediate business financing? Chances are that you answered “yes” to all three of those questions. We all want cash for our business and we want it as soon as possible. Unfortunately, the financing world doesn’t always tell us what we want to hear. If you are properly prepared and have a proven track record (as demonstrated by your revenues and your credit) you can probably get more money – and faster than you think. If you are not prepared … well, you reap what you sow.
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.
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What Business Credit Card Is Right For You?
June 9th, 2008
By The XBanker
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.
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Not All Industries Are Created Equal
May 27th, 2008
By The XBanker
When you are applying for a small business loan or unsecured line of credit at a bank, why do they ask you about your business’ industry? Does it really matter what type of business you run? If you have a history of business success, have stellar business and personal credit, an impeccable resume, and even an outstanding team behind you, the industry you are in shouldn’t play a role in the approval decision, right?
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?
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7 Reasons to Open a Business Checking Account
May 26th, 2008
By The XBanker
- Suppliers. Some local suppliers require a voided business check before extending lines of credit.
- Relationships. Having opened over a dozen business checking accounts, I have found that the process is easier if I open a second or third account with the same bank. It has been my experience that setting up the first bank account with an institution takes ten times as long as successive accounts with that bank. I recommend that you open at least one account with 3-5 major banks. You never know when these relationships will come in handy.
- History. A few months ago, a conversation with a banker at a national bank included the topic of new guidelines his bank was implementing. I took special note of a two-year active checking account history requirement before a line of credit or loan would be issued to a business. It’s never too soon to open an account.
- Merchant Accounts. If you have a merchant account you will want those funds to be deposited into a business account, not your personal account.
- Forms of Payments. In addition to accepting cash and credit cards as forms of payment from your customers, you may decide to accept checks. If your customers have to write checks to you personally, you will lose credibility very quickly.
- Making Payments. In addition to accepting payments, making payments to your vendors with personal checks also looks unprofessional and diminishes your standing.
- Separation of Funds. One of the fundamental principles of business compliance is separating your personal money from your business money. Following this one principle can help you strengthen your corporate veil. The liability protection offered by a corporation is only valid if that corporation is treated like a true business. The complete separation of your business and personal funds is a crucial early step.
Accounts Receivable Financing
May 13th, 2008
By The XBanker
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.
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