Your Credit Score is More than Personal

Friday, May 23, 2008 by Mike Chatas

Fifteen years ago I was sitting at the loan committee table as a credit analyst marveling at the “masterpiece” credit approval memorandum that I had created for one of my loan officers. The document was full of all the fancy ratios and analysis that all of my MBA counterparts wanted (or so I had thought).

The commercial loan manager leaned over to me and said, “Hey Mike, I know you like this deal a lot, don’t you? After all, you sure did spend a lot of time analyzing this credit. But tell me, what gets you excited about this one?”

I eagerly began to go through all of my hard work, showing him my cash flow, collateral, and financial ratio analysis. Almost immediately he began to shake his head and smile. “Thanks for the hard work, don’t worry, I like this deal, too. But I like it for a different reason. It’s not because of that, though.” he said as he pointed to my work. I like this deal because of this.” I looked down at what he was pointing at. He was pointing at the applicant’s 800+ credit score!

I quickly learned the following from this mentor: a prospect might have incredible corporate cash flows, ratios, and collateral; but if the project sponsor (business owner) doesn’t have good personal credit, you don’t have a deal.

Why? Think about it for a moment. With small business lending we deal with individual project sponsors and their willingness to pay us back — not CFOs and nameless shareholders. Business owners with better personal credit tend to do a better job paying off their business obligations as compared to those who have worse credit.

One of the biggest myths about small business lending is that personal credit bureaus don’t matter. “What does my personal credit matter?” we oftentimes hear. “My business is profitable! We can cash flow this deal!” Yes…but are you willing to make your loan payments?

In just about any credit environment, poor personal credit is the number one knockout factor that lenders are not willing to look past. Why? Because it says a lot about the person’s character. If a business owner is willing to take care of his or her personal obligations, regardless of what the economy or business is doing, it says a lot about that person.

In fact, good personal credit is the number-one mitigating factor that allows lenders to get comfortable with just about any deal that might have deficiencies in the borrower’s repayment capacity, collateral, capital, or market conditions.

What you can do:

  • If you don’t know your personal credit score, get a free credit report by going to any of the following credit reporting websites:
  • Look for the following on your report:
    • Is your score less than 680? If so, look for derogatory comments. The bureaus will list why your score is less than perfect.
    • Look for any public records, liens, and other comments.
    • Look for any collection accounts that are tied to your name
  • Work diligently to get the derogatory items removed from your report. Even if it’s a medical claim, you are best served to get all outstanding items paid off.
  • Lingering disputes from creditors can kill your credit score. Tackle each dispute head-on and resolve all of them.

If you need help, try the following site: The Credit Law Group www.creditlawgroup.com

Questions, comments, or concerns? Write us! We’d be happy to help. contact@unitedstructuredfinance.com.

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Leveraging your 401k to Fund your Business

Thursday, May 15, 2008 by Mike Chatas

Where to Find Money to Fund Your Company

Raising equity is one of the toughest tasks for any aspiring small business owner. Even with an SBA guaranty, banks still require small business owners to put some “skin” into the game by requiring them to come to the closing table with their own funds. This is commonly called an “equity injection”. The minimum equity injection required for borrowers is 10%. So on a $500,000 transaction, the small business owner has to come up with $50,000.

But who has $50,000 hanging around in their bank account? Even if you do have $50,000 in your money market, savings, or mutual funds account; it’s usually ear-marked for a rainy day, kids’ education, wedding, or some other major life event.

So where do our clients find their money? In no particular order here are a few sources:

  • Gifts from Family and Friends — Can you look at them in the eye at the Thanksgiving dinner table if things don’t work out and you aren’t able to pay them back for some reason?
  • Private Placement Memorandum — Very expensive and time consuming to put together. Expect to pay at least $10,000 in attorneys and CPA fees. Having shareholders also means you have to live with them as long as they still have ownership in your company.
  • Borrow Against Your Retirement Account — Even if it’s your own retirement account, you are still obligated to repay the loan. Although this is a viable option, it increases your personal debt service, so banks will see this as a negative.
  • Liquidate your Retirement Account — This is also possible, but you will be subject to IRS penalties and fees (especially if you are taking a distribution before you reach 59-½ years of age).
  • Leverage your House — Typically we see this in the form of a home equity loan/second mortgage. This happens very frequently; but it puts your home at risk and increases your personal debt service.

So what’s an Honest Joe supposed to do? Are there any other sources of cash that won’t subject you to penalties, fines, taxes, or embarrassment around the family buffet?

There is an answer! Our friends at DRDA, PC, a CPA and Consulting firm headquartered in Houston, Texas, researched the issue of utilizing qualified retirement plans to fund a business. Douglas Dickey, CPA, developed the Business Owners Retirement Savings Account plan (BORSATM).

What is BORSA? It’s a tool that allows you to fund the purchase of a franchise, business start-up, or business property using your holdings in a 401(a) pension, profit sharing 401(k), 403(b), 475, or IRA rollover. Through the utilization of a BORSA, these purchases can be accomplished without distributions, taxes, penalties, or the use of loans.

In its simplest form, the BORSA plan allows your retirement plan to purchase shares in your new company. Your business basically becomes another investment in your retirement plan’s portfolio. It’s not a loan to the account holder (you) and it’s not a distribution either. Your retirement plan basically becomes another investment in your retirement portfolio. This solution saves you thousands of dollars in taxes and interest expense. Best of all, it provides cash to your business from the Plan and is not a loan (and therefore not an obligation) for you or your company.

For a nominal fee, DRDA PC can put a plan together for you so you can put your money to work for you. These plans have been approved by the IRS and Employee Retirement Income Security Act of 1974 (ERISA). Certain terms, conditions, and restrictions to apply, so make sure you call DRDA PC before you act.

For more information, I recommend you look at the following websites and documents:


You can also contact Suzy Granger. She’s a great source of information on how to get started:

Suzy Granger
Sales & Marketing
DRDA, PC
suzy@drdacpa.com

Questions? Call us at (734) 214-2726. We’re happy to help!

- Mike

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