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    3 Replies Latest reply on Jun 2, 2012 10:32 AM by Erik Salmon

    Forming an LLC to help overcome personal credit and purchase existing business

    noles97 Wayfarer

      Hello, can anyone help me here. I am looking at purchasing a highly successful Health Club. I have managed Health Clubs in the past.  I do have enough Capital to make the needed down payment however my personal credit score is still somewhat low. I have come accross some information suggesting that I can possibly form an LLC before I ever purchase the Business and start to open small amounts of credit under the LLC in order to establish and seperate my business credit from my personal credit and therefore hopefull be able to be approved for the needed financing.  The business itself is listed at 595k and has had a net owners beneift document by three years of tax returns between 220k-265k annually. So the business itself should qualify.  Any advice on how to go about getting myself qualified for the needed financing and if in fact I can open and LLC before actually aquiring the business how do I then take out a line of credit in the LLC's name?  Any help is greatly appreciated!

        • Re: Forming an LLC to help overcome personal credit and purchase existing business
          Erik Salmon Scout

          There is a huge misconception about setting up a business entity to overcome personal credit issues. Here is the absolute truth about business credit. If you have bad personal credit and you are starting a new business you will not get a cash loan or business credit card. You can get suppliers to give you net 30 accounts with a new business but if you need cash, I am sorry it is not going to happen.

           

          A business acquisition loan will be very difficult for you to get approved for with bad personal credit. Most lenders will base cash lines of credit, loans, and credit cards on part or solely on the personal credit of the owners of the business with less than 25 employees and a million in gross revenues.

           

          Sorry if this sounds negative but it is the truth. I have been a business credit consultant for more than a decade and have helped 10's of thousands of clients so I am not just giving you an opinion.

           

          Now having said that, setting up a business entity while you are fixing your personal credit issues would give your company some age to it once you are ready to build out your business credit profile.

           

          If the business opportunity is a good one then I would go to friends, family, saving, home equity, or retirement for funding. I would also ask the owner if they would consider carrying back part of the purchase price. Once your in the business and its profitable and you have fixed your personal credit issues you will be in a better place to get additional financing to pay the remainder of the purchase price. This is just one strategy of many.

           

          Good Luck.

            • Re: Forming an LLC to help overcome personal credit and purchase existing business
              noles97 Wayfarer

              Thank you.  what I have been told is that after opening up an LLC i can the go to say Office Depot or Staples or something similar and open a small amount of credit with them to purchase misc office supplies.  After maikng payments on those for a while that the business credit of the LLC may be rated highly enough that with enough cash in the deal I could maybe get it done.   I didn't mean or intend to apply for a cash loan immediatley after forming the LLC but taking a couple of months to pay off some smaller merchant accounts.  Then try to apply under the LLC for the business loan.  Not sure if my first post communicated my thought process fully, but that was the hope.   Also If anyone has any information on whether it is possible to use a cosigner to help secure the loan initially without that person actually having any ownership in the business from a legal structure standpoint and how soon I would be able to refinance the loan with myself as the only name on the restructured financing. How long would it take 6 months-12months of good payments before I could refinance without the cosigner?  Any info is greatly appreciated. Thanks.

                • Re: Forming an LLC to help overcome personal credit and purchase existing business
                  Erik Salmon Scout

                  Here is the thing, you can get vendor / suppler net 30 account's like office depot, staple, nebs, quill, interstate battery and so on, you will also need to have a mix of types of credit not just supplier credit. The process of getting your business credit profile foundation built will take up to 6 months to setup and 2-5 years of debt servicing.

                   

                  You will still need to have good credit to obtain cash funding from traditional lending sources and most do not even look at a D&B credit report and that is were the majority of the supplier credit will report to.

                   

                  As far as co-signing I would not ask any one who is not part of the company to do that since they do not have a stake in the company and even then, that makes you and anyone co-signing personally liable if the company fails. Its best to get investors and use equity funding in your startup phase, then use debt financing once the company has good cash flow and history.

                   

                  Also be carful of the credit building companies that promise you can get cash regardless of personal credit, you will get a list of suppliers and not much else. Business credit is very similar to personal credit and if you want cash you will need good personal credit and or a good asset to secure the credit with.

                   

                  Good luck.