XBanker

Credit building loophole…or sinkhole?

May 14th, 2008

An entrepreneur invents a “creative” credit building strategy: will it work?

A business owner asks us: “I want to build business credit. My idea is to set up two companies, have one lend money to the other, and build credit that way. Will it work?”

Our answer:

The short answer — don’t do it.

The long answer — it’s not as easy as it sounds.

First, you will have to report the loan to Experian and/or D&B. This is not as simple as calling them and telling them you have an account you want to report. Your company will have to be approved to report, and that means going through an application and review process first. If the company that wants to report is new, it will have to establish its own business credit before it can report. You may also have to undergo a site visit, and/or reference checks. Generally, a company must have at least 500 customer files before it can report to Experian, and D&B will require a smaller company to become a subscriber before it can report.

Secondly, one loan will not make that much of a difference. Each reference helps, but a single one will not make or break your credit history. You will still need to establish additional references.

Third, the credit agencies will request information on the principal of each business. If you are the owner or co-owner of both, that information will be cross referenced.

And that leads to the big problem here: This whole arrangement can easily be considered fraudulent. Loan fraud has been a huge problem lately and lenders are being especially careful. If the credit agencies don’t flag this one as risky, a lender may catch it.

If you think building business credit is tough now, jut wait until your file has been flagged as “high risk” by the commercial credit agencies.

There are easier, more legitimate ways to build business credit. Give them a try first.

Posted by Gerri Detweiler | Currently 2 Comments »

Should You Loan Your Business Your Retirement $$?

March 9th, 2008

Increasing numbers of consumers are tapping their retirement accounts by taking out loans against their 401(k) plans. For entrepreneurs, it’s often considered a no-brainer. There is no credit check, it’s easy to qualify, and there is no banker scrutinizing your loan ap. And the loan won’t be reported to the credit agencies either.

But that doesn’t mean it’s a good idea.

For one thing, depending on your retirement plan, one of these loans may not even be available to you. If you have a traditional IRA, for example, you cannot borrow against it.

If you take out a loan against your 401(k), 403(b) or pension plan, while you still have a “day job” and then leave work, you may be required to pay back the balance immediately or treat it as a withdrawal (which could result in taxes and penalties). The same thing may happen if you can’t keep up with your payments. Because there is usually a five-year repayment schedule for most retirement loans, the payments can be much steeper than credit card minimum payments, for example.

Here’s the biggie — retirement plan assets are usually safe in bankruptcy. Creditors can’t force you to use retirement plan money to repay debts. If things don’t work out with your new venture, you may lose one of the last pieces of financial security you have.

You may be a risk-taker, but make your risks calculated ones. Try to leave your retirement funds alone and focus on building strong business credit instead.

Posted by Gerri Detweiler | Currently 4 Comments »