The world is moving fast, and if you don’t catch up with it, you’ll end up naturally falling behind. The same way with fundability, you need to get up to date with what is going on because, without you knowing it, you just might be following strategies and relying on information that doesn’t work anymore. In this episode, Merrill Chandler talks about the old paradigm, what people still believe, for business credit and how it no longer applies to funding. He gives an update about a podcast episode done a year and a half ago and taps into the truth about “corporate credit” and why the old paradigm is not fundable. In the same strand, Merrill then shows us what the new paradigm looks like and how we can use it to up our fundability game.
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Business Credit: How The Old Paradigm Is Failing You
We’re going to be updating a previous episode from 2019. We’ve got some great insight, some ways to help you with your fundability. We’re talking about the old paradigm of business funding, what people still believe and it’s kicking them in the teeth every single time.
We’re talking about the old paradigm for business credit. Some people even get away with trying to say corporate credit. We’re going to disabuse you of all of those myths, and we’re going to be updating an episode that we’d done in 2019. In this particular instance, we’re talking about the old paradigm for business funding and we’re going to compare it with the new paradigm. This is one you want to watch at GetFundablePodcast.com. You want to see the visuals. I’m going to be as detailed as I possibly can so that we can all take home the best possible results for our time together.
What Is The Old Paradigm
What is the old paradigm? First of all, something happened in 2008. Most individuals who sell a business credit or the business credit salespeople act like nothing happened in 2008. There’s a massive departure from the old way of getting businesses credit. Let me tell you a personal story that you may have heard of if you attended the bootcamp. In 2007 during the run-up, they were financing everything. You could get 125% on the value of vehicles. If you could fog a mirror, they were willing to give you a mortgage. The same was true for business credit. I had my company, Echelon, back in the day still.
In one day, at two different branches of Chase, I filed a single page stated income application asking for $100,000. They pulled my credit, no harm, no foul. Two different branches, two different applications, two different requests for $100,000 each. I was approved within six hours of both of them. I had walked out of that day, put my head on my pillow and $200,000 richer in credit lines, non-personal guaranteed and non-stated income. Things have changed since then that was caused by the mortgage crisis. Remember, they were lending to anybody who would fill out a piece of paper, an application. Now, you have to meet these certain underwriting criteria. It has to be full doc across the board to be able to get a mortgage.
Similar things happened with regards to business credit. I’m going to pull back and let’s get some definitions down. There are groups out there who sell business credit and the business credit they sell you is, “Credit you can use for your business.” That means they’re willing to give you a personal credit card that reports to your personal profile. Every time you use it for business, it ruins your personal profile because your balances go up, your utilization goes up, your score goes down, and your fundability goes down. They’re using language to deceive you because they’re relying on your ignorance. They’re relying on the fact that you don’t know the rules of this game, so they call it business credit.
Here’s another thing. Some of them will say, “We’ll get you a credit line for $20,000,” but they will then show you on their website that says, “Credit line equals $20,000.” Up in the top left it will say, “Bank of America business credit card.” It’s a credit card, not a credit line, even though the bank uses the term credit line instead of credit limit. They’re in the business of getting you credit lines. They completely blur the lines to deceive you because small business owners, entrepreneurs, real estate investors, and everybody are looking for business credit. Most of you are looking for true business credit, write a check and do a deal. Not a convenience check, which is another thing these guys do. They’ll say you can write a check but it’s a convenience check. That convenience check is more like a cash advance check. It’s not a true credit line. It’s a business credit instrument called a credit line by banks and financial institutions.
Things have changed since 2008 just like mortgages required tons of documentation. On the business credit side, they stopped using references to your business credit. They cut it out. The Dun & Bradstreet PAYDEX Score that was valuable before 2008 is no longer a valuable measure of your business fundability. Why? It’s because the old paradigm would use credit that was acquired for your business like vendor credit or retail credit. On the personal side, it’s what we call tier-four, 40% junk cards. Dun & Bradstreet records those. You would get a Dun & Bradstreet score, and then Dun & Bradstreet would offer you more credit. Since 2008, not a single bank uses automatic underwriting criteria. Part of that automatic underwriting criteria is not your PAYDEX Score. They use your personal profile to establish your credit worthiness or your fundability.
That all started with the new algorithms that FICO is coming out with, and that the lenders started underwriting their business credit instruments. It all started on in the interview I had on previous episodes. David Smith of FICO said that 80% of a funding decision or a business lender’s decision to lend you a credit line or a business loan was based on the personal profile of the principal of the business. The other 20% is based on the data points that match your personal profile. If my PBID, my Personal Borrower ID, is Merrill R. Chandler, but I have Merrill Chandler or Merrill Ray Chandler, that is close but it’s not a perfect match. They’re looking at who owns the business. If who owns the business is different than who the principal is, then you’re going to get yellow flags, red flags or denials.Who you are is separate and distinct from who the business is.#GetFundable Click To Tweet
The whole point of the old paradigm, new paradigm is that in the old paradigm, they are using terms now that were only valid pre-2008. The other thing you’ve got to watch out for is the use of the word corporate credit. In technical usage by all the banks and institutions, corporate credit is usually for institutions that are $10 million value or higher than $10 million in revenue. It’s where you have a Standard & Poor’s credit rating as a corporation. Those corporations are not backstopped by the principals, the CEO, the chairman of the board or the board of directors. That’s corporate credit.
It’s not your fault, this was none of our fault when we didn’t know. It’s because they’re trying to make it sound cool, “We can get you corporate credit.” They’re not getting you corporate credit because corporate credit is credit lines. It’s $100,000, $10 million credit lines to use with your corporation that is worth $10 million to $50 million or more. That’s corporate credit. If you hear somebody say, “We’ll get you corporate credit at 0% interest,” they’re selling you credit cards. Only credit cards offer 0% credit as a promo. There’s not a credit line in the universe that says, “We’ll let you write a check and do a deal interest-free.” If it says interest-free or 0%, take it home to the bank. They are talking about 0% credit cards and most of them report on your personal profile.
From Old To New
We’re going to start out. That’s our stage here. We want now to demonstrate how that old paradigm turned into what makes you fundable now as a business. Number one, the old paradigm is all about why business lenders won’t lend to you now. It worked for me. I got $200,000 in unsecured stated income true credit lines from Chase back in 2007. You have to do it differently now. They’re still available but now we’re going to talk about the old way and the new way. I ask you on a regular basis, do you classify yourself as a business owner? Do you ever think of yourself as self-employed? You wouldn’t believe that 40% of people who come to my bootcamp have self-employed as their employer. We’re going to talk about how that isn’t serving your cause when you’re going for business borrowing.
Do you consider yourself an employed professional? If you go to any application right now, there’s a drop down, “Who are you? Tell us about who you are.” It’s going to be employed, unemployed, self-employed, student, disabled, retired, military. You get to pick which one. I ask you, which of all of those is the most fundable? Which is the most dependable when it comes to income? Unemployed, employed, or self-employed? In my bootcamp, the answer is obvious. Everybody shouts out that employed is the most dependable. You may come back and say, “I am employed by my own company.” That’s okay. As long as you are the principal of the company, we want to separate you from being the owner as being the runner, the manager of the company.
You are the principal of the company. Business owners are not a safe and reliable bet for business lenders. The business owner creates degrees of uncertainty. There’s the very tight words that say that there are variables that need to be investigated, “Tell me about your business.” The other thing is a self-employed is also not safe and reliable. The term self-employed creates degrees of uncertainty. There are variables that need to be discussed. Tell me about your business, because you’re focusing everything over on your business. In this environment, an employed professional is what is safe and reliable. Think of it this way. If you are the employed professional, the language itself besides all the facts says that my business is sufficiently funded. It is doing well enough that I’m employed by it.
You can have a W-2 or 1099. You can take disbursements as an owner. When you’re an employed professional, when you are the principal, not the owner, it’s not semantics, then you are far more fundable than if you are the owner of the business. Lenders are looking for borrowers who create conditions of trust and someone who is going to treat their money, their funds with deference and respect. The face of fundability is once upon a time, there was the legend of non-personal guarantees. Before 2008, that $200,000 that I got from Chase was not personally guaranteed. It was solely on my business.
We’ll use the example of Wells Fargo, which I do have. If I have credit lines at Wells Fargo, I’m on the line for it. Non-personally guaranteed is for cash lines. A cash line is something you can use the same as cash. It’s not a Staples credit card that you can only shop at Staples. It’s not a Home Depot where you can only shop at Home Depot. Those are not cash lines, cash cards. There are numerous types. You can get cash cards that are not personally guaranteed. For true cash lines, there is no such thing as not being on the line for it or on the hook where there’s not a personal guarantee. The personal guarantee comes with a credit card, credit line, charge cards, installment loans for business credit, non-PG are retail cards and gas cards.
Get a Uline. They’re not going to put you on the hook for a Uline account for ordering office supplies, FedEx, Staples. You’re not on the line for those. Vendor credit is your internet, phone service, web hosting. You’re not on the line for those, but the individuals who say, “We’re going to get you non-personally guaranteed credit lines,” are actually talking about what’s below that red line. That’s the thing that we need to understand most. Let’s go to what the new paradigm is. The old paradigm doesn’t exist anymore. That’s why it’s the old paradigm. You cannot get a business line of credit, a business loan without being on the hook for it. That was years ago and yet untoward businesses now are still selling corporate credit that doesn’t exist for small businesses.
They’re selling the business credit lines and non-PG credit, non-personal guaranteed credit. What they’re referring to is a Staples account, Uline, Federal Express or gas cards. The old paradigm is not fundable, but let’s understand why it’s not fundable. Let’s say you’re an enterprising soul. I’m going to pick this because it represents the vast majority of the people that go to my bootcamps or who are reading. Let’s say you have a note buying business, you have a buy and hold business for your rentals. You have a fix and flip. Let’s say you even have a franchise and you do private lending to other real estate investors. In the old paradigm, we think that we have to get money. We’ve got to get a loan for our note business. We’ve got to get a loan for our buy and hold business. We’ve got to get a loan. We’ve got to get money individually for each one of the businesses that we have. The thing is lenders don’t like lending to small businesses. I’ve told this story a dozen times, but it bears repeating now. At FICO World 2019, there was a panel of 5 or 6 lender representatives, the heads of underwriting for these lenders. They think only lenders are sitting in the audience, but I’m representing borrowers.
They don’t know me. They don’t know that I’m there, but they were making jokes that when somebody would come in looking for a $50,000 or a $100,000 business loan, they would scatter like cockroaches. They’d be like, “The guy is not in. Come back later. I’m sorry, can I take your name and number? I’ll have somebody get ahold of you.” They never follow up because in that environment, anything under $1 million is a waste of their time because it requires full documentation at those institutions. They think you’re coming to get a loan for a business. I’ll share more about how it can be different. They need to collect all the same documentation and all the same work for $50,000 as they would for $5 million. It’s the same review of financials, tax returns, your application and all the accompanied documentation.
They don’t want to lend to your business. They’re not interested. It’s a waste of their time and it’s very low yield for them. They were joking in this panel among themselves that they would all scatter. If there was somebody coming in like you or me, “Can I get $100,000?” $100,000 for you and I is a game-changer. The number of properties we can take down, the number of notes we can invest in. That is an amazing step towards more success for us, but they’re not interested in a $100,000 borrower.
The old paradigm makes you, the owner of the note buying company, the buy and hold company, the fix-and-flip company. In the manual underwriting world, you are the owner. They have to vet you and the business completely. The problem that this brings up is that business owners are not fundable straight up. When you walk in there and say, “I own a business and I want a loan.” The first thing they’re going to do is, “I want your taxes. I want your financials. I want to mortgage your firstborn child and I want to know everything I could possibly know and I’m going to secure it. If you don’t have something to secure it with, I’m not going to lend you.” They want to know all the facts.
The belts and suspenders for them, they want to make sure you have something, “We’ll put up the equity in your home. Let’s give you a HELOC as this business loan.” It’s ridiculous, especially when you know the new paradigm. They want to secure that alone with your assets. Being the business owner is unfundable. Being self-employed is unfundable. We bring this on ourselves until you started checking out what fundability actually is, you believe you are what you do, “I’m a real estate investor.” You’re not. You are not a real estate investor. You’re not a note investor. You’re not a business owner. You’re not a franchisee. Especially, you are not the deals that you do. What you are is an entrepreneur.
You’ve chosen a wealth strategy to achieve your goals, your dreams, your why. You are an employed professional by your own organization. If you’re an employed professional by a fundable organization, you will make the day of these lenders because now you fit into a completely different class than the ones they hate working with. Unless you want $5 million to $10 million and you have the assets to back it up, they don’t want to talk to you. If you are an employed professional, representing a fundable business that fits automatic underwriting guidelines, they are all over you. Every loan approval for entrepreneurial and small business loans, 80% of that decision is based on your personal profile as the principal of the organization, as the employed professional. They’re going to approve or deny you based on how good your personal profile is.
They’re then going to look to see if the entity is fundable. By fundable, is it a legitimate entity that matches the data points so that the principal and the business are congruent? To further what David said, you have to optimize the principal’s profile for business credit approvals. You’ve got to do things to the personal profile that’s going to pass muster in the automatic underwriting software. The old paradigm is we want to get away from you being the owner of all these different enterprises. We’re going to call those client companies.
All those companies, everything that you’re doing, you could have 1 or 10, but if you say you’re the owner of all of those, we’re already dead in the water. We’re going to go down the old paradigm route of full doc required and a whole grip of hassle to secure it with your assets. If you don’t have the assets, they’re not going to lend to you. Eighty percent of the lending decision is based on the principal’s personal profile. Lenders love to lend to the genius behind the business. They want to lend to the strategist behind the business, the person who knows how to make good decisions, the employed professional.Lenders love to lend to the genius behind the business. They want to lend to the strategist behind the business, the person who knows how to make good decisions, the employed professional #GetFundable Click To Tweet
The Most Fundable Strategy
Let’s talk about what the most fundable strategy is. All of those entities are what we call client companies. Remember, you have a note buying entity, buy and hold, fix-and-flip franchise, private lending, even the next opportunity, cold fusion storage if you will. Each one of those, a qualified fundable entity has to be a bank-facing entity. It’s got to be transparent. It’s got to have viable ownership and there are criteria to that. This is skipping a stone across an 800-foot lake, but I’m trying to give you as much information. If you haven’t been to the bootcamp, come to the bootcamp. Go to GetFundableBootcamp.com. We’ll show you how to set one of these up.
The bank-facing entity means that they’re not lending to a QFE, a Qualified Fundable Entity, they’re lending to you behind the entity. You’re the 80% worth decision-making. They want to lend to the principal. It has to be a bank-facing entity. This entity can’t own other entities. No wholly owned subsidiaries. It can’t be a holding company. It can’t be owned by any other entities and it can’t own any entity. Think of it as your asset protection, all holding companies, trusts, land trusts and LLCs to hold your properties. If all of these is your asset protection organization chart, way up here all by itself is your fundable entity. It can’t have any deal-killing assets. If someone were to ask for your books, we don’t want to see a whole bunch of assets. We don’t want to see a whole bunch of properties or rentals or loan notes because they’re going to say, “Great.” They’re going to go straight from automatic underwriting to manual underwriting. They’re going to want to use those as security. We don’t want that. We want to stay in the lane that is automatic underwriting. No deal-killing assets and it has to have legitimate income.
What do I mean by legitimate income? If you’ve got a note company, then you’ve got notes that are paying points, interest, monthly payments on the mortgage or otherwise. A lender in automatic underwriting isn’t going to count your mortgage payments as legitimate income. They won’t do it because it’s not stable. What happens if those guys stopped paying? What happens if your notes come due and they’re not paying on them? Lenders in automatic underwriting, which is the cherry on top of all approvals, they’re going to go, “You’ve got points and interests? Let’s do full documentation.” Now, you start to see why they don’t want to work with you. If you’re asking for $100,000 from one bank, then they don’t want to go through all of this mess of evaluating your mortgage notes and longevity.
It’s the same thing on rents. They’re not going to take rents as legitimate income. They won’t count it because they won’t count it in automatic underwriting mode. If you switch lanes and go to manual, they’ll be, “You guys have heard it. Let’s take 85% of occupancy for 75% of the year and we’ll count that towards the income.” Let’s say you’re bringing in $2,000, $3,000 or $5,000 in income. You’ll only get to claim on as income for this loan of $2,500. That’s ludicrous. Fix and flips, try and tell a lender that you would like to have $100,000 so that you can flip a house and make $10,000 to $30,000 or $40,000. They’ll be, “I want to note on that house.” They’re going to try and secure it.
There are two lanes, automatic underwriting which is the sweet spot of funding, and then manual underwriting. They don’t want to work with you in manual because they’re doing all of this book work to find out if they’ll give you $50,000 to $100,000. They don’t want to do it. You don’t want to work that hard trying to get $100,000. Profits from your franchise, if you have a notes business, they don’t want to lend to you if you’re counting interest rate on not mortgage notes this time, but where you’re doing personal loans, where you’re fronting capital for real estate investors or other business owners.
That’s not legitimate income for a lender. It’s legitimate income at some significantly discounted amount for manual underwriting, but with automatic underwriting, they’re not going to count any of that because they want proof. That’s a business owner trying to prove up. They want an employed professional that they could look at the profile, look at the business and give you money. Let’s look at how we can create that. Let’s call every one of those types of businesses as your client. If they’re your client, what does that make you? Let us split up this process, the QFE. You’re the strategist. You went to real estate school. You got the education to become a note buyer. You are the strategist, the decision maker, the genius behind these deals. The deals are happening down in your clients.
Your client companies, that note company, the buy and hold, the fix-and-flip company, that’s where you execute your strategies. Let’s separate those. Let’s put the strategist, let’s put you in the QFE, the Qualified Fundable Entity and separate that from those client companies. How do we do that? You say, “I own the fix-and-flip company. I own the buy and hold company. I own the franchise.” In 2010, it was originally associated with the elections, but it’s had far and wide sweeping effects for a number of industries, including this one. In 2010, the Supreme Court ruled that entities are people too. Meaning that the owner of the entity and the entity itself are not the same person by legal definition.
Who you are is separate and distinct from who the business is. It’s a Supreme Court ruling. Your client companies, even though you own, you are the owner, the shareholder, the sole member or whatever, those client companies are separate from the strategist in the QFE. The QFE is the strategy level, all the clients are down below. We’re separating you from your entities as per the Supreme Court. Now that you are separate, you get to treat those client companies separate from you, even if you are technically the shareholder or the member of that LLC.
How do we do this? We convert non-usable profits into usable revenue for the QFE, the Qualified Fundable Entity by making you the strategist, the consultant, the management or the advisor to all of those client companies. You are separate from those client companies. Don’t get it confused that I own these client companies, the fix and flip, the buy and hold, and the franchise. It doesn’t matter that you own them. They are separate from the strategist. You’re the one making the decisions for every one of your income streams. You’re the one doing that. All we’re doing is making the QFE, the Qualified Fundable Entity, embody your strategy and calling it a consulting firm, a management firm or an advisory group.
The second we do that, those profits that have to be income from your notes business, your buy and hold, your rentals, your fix and flips, your franchise, all of those, we automatically convert those. If you put those down on an application, they want to see them. If you convert that, each one of those clients start paying consulting and management fees. I’m not talking about property management. I’m talking about strategy. You are a strategist. If they start paying you fees, then Bank of America, Wells, Chase, all the tier-one, tier-two banks, and everybody who’s in the lending business, they love this model because they don’t have to do all the BS of vetting all of your deals. You are billing your clients for consulting fees, for management fees, marketing fees and advisory fees. You can sit on a board and get a board of director fee, but you are the strategist up above and they are clients below. Every time they pay you a fee, then your income is massively legitimate to lenders.
Since there are no assets, you’re an income-and-expense type of business. Everything that you’re doing translates from ugly money, dirty money, points and fees, and profits from flips and rents turns into our client companies are paying you management and consulting fees for your genius. Lenders will lend to that perfect model. They will do it without requiring income verification. These are stated income. This model shows that you are a fundable employed professional, that you are personally fundable and that your business model is one where you are the strategist, the genius that’s being paid. You’re being paid by other companies. It doesn’t matter who owns them, including yourself.
You’re being paid by other companies for your genius, and lenders love to lend to that. You are not your deals. You are not your businesses. Lenders are willing to fund you. They do not want to fund your business at all. The long and short of it is we got to know what’s business credit and what’s not business credit. You are fundable, the second you have a fundable personal profile. Your entity is fundable when you separate the strategist level from the client level. The clients bring in their revenues from wherever they get them and pay you, the strategist, management consulting and marketing fees.
If you want to figure out how this applies to your particular thing, go to GetFundableBootcamp.com. It’s a two-day dive into personal and business fundability. When it comes to fundability, that’s quite a bit. What we need to understand is if we know what the rules of the game are, we can play it. Not just win it, we can master it. That is my hope for you and your loved ones, that you take whatever you’re learning and let’s continue to walk with me down this fundability path. Get a copy of the book at GetFundableBook.com. It’s free. I will get you a copy of the book. You just cover the shipping. Tell me where to send it.
Keep walking down this path. That’s what I would implore. In the middle of coming out of whatever we’re doing with the pandemics and recessions that look they’re teetering on the edge of crushing us. We have no idea what’s happening. What I do know is lenders only make money when they lend. Their favorite way to lend is through unsecured stated income, automatic underwriting, because they trust their software to make positive decisions. Put yourself in that flow. Make your business fundable, a QFE, Qualified Fundable Entity, and make your personal profile fundable. Our clients are still getting it 6, 7 months into COVID. We’re averaging $2 million to $3 million in fundings every month. We’re $12 million for this period. Come and get your slice of the pie. Let’s keep going. I’ll see you next time.
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