Access Capital with No Personal Guarantees. This is How
Mar 26, 2024
Having liquidity is key to all franchise owners and franchisees who want to grow their businesses. But for many of them, accessing funding is not easy. Do you know what are your alternatives?
I’ve been in the franchise industry for over 35 years and shockingly I had never heard of this. So, when I learned more about it, I immediately invited Chris Medley, from Cape Ladder, to share this information for our Franchise Supporters playlist on YouTube, so you can capitalize on this option and use it in your favor!
In this blog post, I’ll go over the insights of my interview with Chris. Take notes and discover how you can stop using your credit to fund your business!
But first, subscribe to our YouTube channel and our podcast, and follow us on all social platforms!
Who is Chris Medley?
He’s the Director of Strategic Partnerships and COO at CapLadder, a technology-enabled financial services company that helps business owners, including franchise owners, franchisees, or independent business owners, to build business credit on their EIN so they can access alternative lending options quickly and without using their personal credit or guarantees. He also develops strategic partners in various industries.
Personal vs. Business Credit
Just as there are bureaus that research and score people’s credit information, there are also business credit bureaus that monitor the business's financial health.
This information is used by institutions to give business owners access to capital and determine interest rates and many other elements around credit. In the United States, these agencies include Equifax Small Business, Experian Business, and Dun & Bradstreet.
“All businesses have a business credit score. If you set up an EIN, you have a business credit score, and it can go from 0 to 100”, Chris explained.
- The score you want to get is an 80 plus (that it's like having a 750 on your personal credit score) “because then you’ll be able to access the best interest rates and the most capital.
Sadly, he pointed out, no one taught business owners they have to build the other side, the business credit side, so most of them end up using personal credit and personal guarantees to fund their business. But that could get them in trouble because if anything happens, the banks can come after their personal assets to get paid.
“Your LLC does not protect you from debt. We all think we set up our LLC to handle all these liabilities because it's a separate entity. But if you guaranteed anything for your business, you are allowing those creditors to access your personal savings accounts depending on how much you owe”, explained the specialist.
- The only way you can protect your assets is by building out your business's private credit profile on your EIN number, which acts like the Social Security Number for your business.
How does business credit work?
Unlike personal credit, where everything is done automatically, Chris mentioned how business credit has to be built intentionally, step by step, and every day so that when you need it, it's there for you.
He also made it clear that for banks and lenders, the business information is public, which means that institutions can pull your business credit report anytime they want. A lot of them do that on a daily basis, and they require no permission at all because those pulls don’t affect the credit score.
So, it is best if you take the steps to make your business look credible to those banks and financial institutions so it is appealing to them and you can access loans and working capital. “If they’re pulling credit reports and they see zero, 8, 10, and no trade lines, no credit, you're going to get skipped over for money”.
6 Benefits of EIN-based business credit
Why would franchisees or business owners have an EIN-based business credit score at all? Chris mentioned:
1. Protecting your assets so they aren’t exposed to creditors. That means that, if something happens to the business, your assets won’t be responsible for backing up those business loans.
“You don’t have to worry about selling your house to pay. The business is the one that applies for the credit and the capital, and it will take the responsibility of paying the business card. If it goes under one day, you can follow bankruptcy on the business and move forward”.
2. Separating your business from personal finances. It doesn't matter if you're a startup or you’ve been in business for 20 years. It also doesn't matter if you have a 500 or an 800 in your personal credit score. The average business owner has a 620 credit score according to SBA. That doesn’t get the best rates in terms.
“With this option, you can build business credit on your end because this process is not tied to your personal credit card. It's like it doesn't exist”.
3. Getting access to more capital credit than you would using your personal credit.
“Building out business credit will get you access to probably 85 to 90% of the funding you're ever going to need to run your business. You can even get money from non-banks and all kinds of different resources and alternative financing”, he explained.
4. Having the power to establish strategic partnerships that leverage your business credit so that your business can stand on its own two feet as an entity. “If, for example, you have a 90 score, you can go to an institution and have more power to negotiate the terms of a loan”.
But beware: as part of their policies, some banks require personal guarantees no matter what your business credit score is. So, if you are going to want to work with a bank, Chris recommends going to your local or regional bank because they are more savvy and active in working with small business owners in their communities.
5. Increase the value of your business. If you have your business credit in your EIN and you want to sell your franchise, you can transfer that capital and credit to the buyer, meaning it would be available for them to run, fund, and grow the business even further.
“That makes the business a lot more attractive to the potential buyers because they can just jump in and it makes the business worth more”. The only challenge would be that the buyer understands business credit.
6. Weather any storm. Having a business credit can help you take advantage of opportunities as they come up. It's all about having access to capital, whether you use it or not.
“It's just another reason to have this in your arsenal. Emergencies always happen and if you have a backup to get back on the road and take care of your customers, that will protect your business so you can move forward.”
For Chris, there are no disadvantages to using this financial instrument, but it is probably not for everybody. “If I don't have a lot of overhead or I don't have long-term growth plans for my business, I don't need business credit, and my credit it’s fine”, he explained. “Solopreneurs cannot build business credit. You have to be at least an LLC to build business credit”.
How to start building your business credit score
As Chris pointed out during our conversation, having business credit is critical for business owners. But, what is the first step you should take to start building it?
“We have a six-step process for business owners who want to access the capital credit they need in 6 to 8 months, on average”. Steps 1 and 2 revolve around getting the business credible in the eyes of the banks and financial institutions.
“That’s challenge number one because there are 125 factors that influence how these institutions see your business and if you don't know them, you're going to struggle and you may get declined”. The rest of the steps imply building credit on the different trade lines.
Challenge number two is working with the right type of vendors and lenders. “The way you build a business credit score is by payment history but since business credit is not regulated, only 10% of all lenders and vendors report your pay history to those three bureaus mentioned before”, said Chris. “So if you are not working with that 10%, you could be doing all the right things but if they are not the right vendors or lenders, you will not build business credit”.
The third challenge when building your business credit score is you have to do it in the right order. If you apply for something that you're not ready for and you get denied, you have to wait 6 to 12 months before you can apply again.
Chris gave us a lot of valuable information and many things to think about that can elevate our businesses. You can reach out to him and learn more about what CapLadder does and how you can go through this process a little faster, visit our Franchise Supporters playlist on our YouTube channel.
WATCH THIS INTERVIEW on YouTube HERE.
