I recently formed my company and opened up a small business checking…In the process, I applied for a small business line of credit. My credit personally is stellar, but the underwriter said they would not open up a line of credit in my business name because it hasn’t established any credit yet. The bank manager then told me that I could open up a home equity line of credit which would allow me to gain access to more money should I need it anyway.
What are your thoughts on using your personal property as a line of credit for business purposes? Are there other options for getting money to do work needed when I find a property other than hard money lenders or equity line of credit?
It depends upon the kind of business entity. If it is a sole proprietorship, I cannot think of a reason why you shouldn't tap into home equity for business expenses. If the business entity is an LLC, and you mix personal and business accounts or money, you run the risk of exposing yourself to the risk of losing limited liability.
If you need to build business credit, and you want to limit your liability and mix personal and business money and accounts, perhaps you should just cover yourself with an umbrella insurance policy.
These are just suggestions and I believe that you should ask an attorney and an insurance consultant before you develop a business practice.
First, most business owners have to put their personal property at risk when they get business credit. So I wouldn’t sweat that. Obviously the risk is that you’re borrowing money against your house, but then again you’re not supposed to be borrowing money that you can’t repay, correct?
Your options seem to be using the personal HELOC and then taking the advances from that line and depositing them into a business checking account. This will either be paid-in capital or a “due from” balance. As the previous responder said, you should not just pay business expenses right from the HELOC through checks or credit cards. There needs to be a clear flow of funds so that business expenses are paid from business assets.
Your other option, which your banker should have thought of, is to establish a line of credit in the business name and then secure it with a lien on your home. You are simply pledging the collateral for the business loan.
This is much cleaner than the first option, and it starts to build a credit relationship in the name of the business. If your banker won’t do it, find one that will.
I agree with Paul that you should try to get the loan in the name of the business and use the business tax id along with your social to start to build the credit. I don’t agree that you need to deposit money into you business account before you can use it unless you are using the HELOC for both personal and business. The key is to keep it separate so if you only use it for business purposes you should be fine writing checks directly out of you HELOC. You can deduct the interest as a business expense on your business returns and not your personal return. I am not an accountant but his is what I was told when I used a similar strategy.
Using your primary home as the collateral is good because the interest rates and fees should be lower than anything else you will find.
The problem with that, at least the way I see it, is that the checks from the HELOC will not have a business name on them, that is, they will not be written from the business. As a result, the business can not (technically) take the expense or treat the expenditure as a capitalized asset. The funds are from an individual, so it’s the individual that takes the expense or claims the asset.
In the interest of truly separating the two (your personal and business lives), I would have a business checking account with all business related transactions flowing from that account.
OK, just so I understand (you’ll have to bear with me, I’m still learning). If I get a HELOC and tap into it, I would write a personal check to deposit the funds into my business checking. I would then use my business checks, etc. for the expenses incurred via the business…
If I get a HELOC, would that mean I’d need to also open a personal checking account with this bank? (I currently have my personal checking with another bank)
The bank may want you to have a personal checking account with them, but it’s probably not 100% necessary. (Sometimes you get a better rate if you have a checking account with them, and sometimes you get a better rate if you let them deduct the interest payments automatically from that account.)
Most HELOCs come with a checkbook that allows you to access the line via check. You can also sometimes get a Visa card.
You would write a check against the HELOC and deposit it into the business account. Depending on certain factors, you may or may not get access to the funds next day.
If you’re going to use the HELOC and write a check to the LLC, don’t forget to make a formal LLC resolution approving the loan from a member (you) and enter it into the books along with the loan agreement and repayment schedule. This is where alot people mess up and lose their liability protection when push comes to shove (improperly mixing personal and business).
If you’re looking to establish business credit separately from your personal credit you need to follow a systematic approach:
1)Make sure your entity is established correctly with proper business licensing, business phone & email, physical address (no P.O.s or virtual offices), EIN, State Tax ID if applicable, business bank account, etc (bank lenders check these things),
2)Open a D&B account,
3)Establish trade accounts with companies who give credit lines (however small) w/o personal guarantees AND report to D&B, Experian Business, etc (there is a lot of them out there),
4)Pay the trade lines early EVERY month (after a few short months you will have a D&B Paydex score that is very good – above 70),
5)After you have established a good Paydex number, apply for a cash line of credit w/o a personal guarantee (there are a lot of banks that will do this),
6)Make the “cash line” monthly payments early every month,
7)Keep growing your cash lines – within a year to 18-months you should have at least $200K in trade and cash lines of credit.
There are other steps as well but that was the jist of it.
I’ve also heard that if your personal FICO is over 680 and you have an LLC, WITH a personal guarantee it is possible to get a $150K/10-yr business startup loan. I strongly recommend checking out the business credit forum at creditboards.com or using a professional if you are unfamiliar with building business credit. Full service business credit building services range in cost from $2,500 to $10,000 including coaching but I don’t really recommend it base on an unpleasant experience I am currently going through. You can also buy DIY business credit builder kits for around $500.
Also, another option to HMLs is to use a Private Lender. The typical deal is somewhere around a 50/50 split on the profits with the PL providing all the funds necessary for the flip. This could be cheaper or more than an HML depending on the profit margin and time the property stays on the market. Keep in mind when looking for a PL, he will want to see a lot of DETAIL on your project - to the penny - with more than one exit strategy. He’ll also want to know just how qualified and capable you are.