Making this blunder will cause you to be rejected by 98% of all lenders

11Apr07

Most entrepreneurs don’t realize that building business credit began long before they submitted their first application.   Actually, you took your first step toward building business credit when you chose your company’s legal structure.  Without realizing it, your decision to remain a sole proprietor, incorporate or become a limited liability placed your business in either a preferred or rejected category with lenders.  Which legal structure is best?

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You see, one of the first things that lenders evaluate is whether your business is structured as a “true business”. 

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What does that mean?  Let’s look at a case study.  This is the story of Jim Jones, a local businessman.  

          Jim has become well known in the community as an excellent computer technician.  He  repairs printers, upgrades older computers and has built quite an inventory of hard to find parts, fun accessories and software.  He didn’t mind working late into the night to finish jobs for his family, friends and neighbors.  You can imagine how excited he was when he was informed by the school board that he had been awarded an annual contract to upgrade and repair the systems in their administrative offices.  

He spent an entire afternoon  making calls to his closest friends and colleagues to share the good news.  After the furor died down, the preparations begin.  He organized his daily schedule; hired his sister-in law to work part time as his bookkeeper and hired three technicians to work on an as needed basis.  

He knew that he needed to purchase additional equipment so he made an appointment to visit his local bank and applied for a small loan.  Having very good credit, he was approved and within two weeks, he had the $15,000 that he needed to purchase new equipment. 

Did Jim build business credit?   The answer is a resounding NO!.     Many would beg to differ, after all he explained to the lender how he would use the funds and he paid his loan note every month on time.  What did Jim do wrong?
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In the next few posts, we’ll examine each of the blunders that Jim and 97% of all entrepreneurs are makings.

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For now lets start with the first blunder. 

Jim failed to properly structure his company.  In all of his planning and excitement, Jim didn’t even consider the importance of changing his legal structure.   Jim was a sole proprietor.  Not only was this the easiest way to operate a business, Jim’s best friend, a local accountant advised him to wait until the business made a certain amount of revenue before incorporating.  After all, why bother with all of that paperwork until you are sure the business is going to be successful.  This advice is common. 

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As a sole proprietor, your personal assets and credit are combined with your business assets and credit.

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Though you have less paperwork, you have not established your business as a separate entity and therefore, it can not be granted credit on  it’s own without your personal guaranty.  Well how did Jim get approved for his loan?

The banker pulled Jim’s personal credit report and made a decision based solely on his personal credit score.   When Jim makes his timely payments every month, they are reported on his consumers credit report, not a business credit report.  Jim gets the credit, not the business.  In the eyes of the bank, they are doing business with Jim, not his business. 

What should Jim do? First, he should click the link in the right column and download our Guide to Choosing a Legal Structure.    This will give him an understanding of the pros and cons of each legal structure.  Next, he should contact the secretary of state in his home state and request a copy of the Articles of Incorporation if he has chosen to become a corporation.  If he has chosen to become a limited liability company, he should request the Articles of Organization. 

Being wise, Jim understood that filing Articles with your Secretary of State is only one of several tasks that have to be completed to successfully establish a new legal structure.   He heard someone mention that he needed to prepare bylaws, choose a board of directors, prepare meeting minutes, stock ledgers and board resolutions. 

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He needed help and only had a small budget.   

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Jim ordered the Business Credit Xpress Program, began immediately following the steps in the Business Management Kit ( an bonus program in Business Credit Xpress that provides all of the forms and contracts needed to organize your corporation).   Jim was well on his way to correcting his first blunder. 

Jim has taken the first step in building business credit.  Have you?

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