The world is moving fast, and if you don’t catch up with it, you’ll end up naturally falling behind! It’s the exact same way with fundability™…you have to stay up to date with what is going on because—without realizing it—you might be following strategies and relying on information that doesn’t work anymore. In this episode, Merrill Chandler talks about the old paradigm, which is what people still believe for business credit and how it no longer applies to funding. He gives an update about a podcast episode posted over a year ago and taps into the truth about “corporate credit” and why the old paradigm is not fundable. In the same strand, he 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
Today we’re going to be diving into a previous episode that was posted back in 2019 and updating the important information within. It includes some amazing insight on ways to help you with your fundability™! The main topic that will be covered is the old paradigm of business funding—which is constantly evolving throughout time. Countless individuals still believe in the old information and it ends up kicking them in the teeth every single time.
The old paradigm for business credit (or corporate credit, as some people say) is a very tricky phenomenon. In this article, we are going to disabuse you of all the myths surrounding it. In this particular instance, we’ll compare and contrast the old paradigm from the new paradigm. If you would like to watch this episode to see all of the visuals, check it out at GetFundablePodcast.com. Throughout this process, I will explain the various subjects as detailed as I can so that you will be able to take home the best possible understanding from our time together.
What Is The Old Paradigm
Before we continue with anything else, you have to understand exactly what the old paradigm is, if you didn’t already. Let’s begin with the event that occurred back in 2008. Most business credit salespeople love to pretend as though nothing happened that year…but in reality, there was a massive departure from the old way of getting businesses credit.
To help put it in perspective, I’ll share with you a personal story—one you may have already heard of if you attended my bootcamp. In 2007, during the run-up, they were financing everything! You could even get 125% on the value of vehicles. Basically if you could fog a mirror, they were willing to give you a mortgage, and the same was true for business credit. At that point in time, I still had my company Echelon. In just one day—at two different branches of Chase—I filed a single page of a stated income application asking for $100,000. They simply pulled my credit! Two different branches, two different applications, two different requests for $100,000 each…no harm, no foul! I was even approved within six hours for both of them. That night, I went to bed knowing that I was $200,000 richer in credit lines…non-personal guaranteed and non-stated income. They were basically lending to anybody who would simply fill out an application.
But things have changed since then, caused by the mortgage crisis. Now, you have to meet certain underwriting criteria, and it has to be full-doc across the board in order to get a mortgage. This similar changed occurred in regards to business credit as well. There are groups out there who sell business credit that they claim is, “Credit you can use for your business.” Many individuals don’t realize this means they’re willing to give you a personal credit card that reports to your personal profile…but every time you use it for business, it ruins your personal profile! It causes your balances and utilization to rise, while your score and fundability™ both plummet. These people use manipulate language to deceive you because they are relying on your ignorance. They truly believe that you don’t know the rules of the game, so they flat out lie and tell you it is business credit.
Some of them will say, “We’ll get you a credit line for $20,000,” even though their website simultaneously states that a credit line equals $20,000. And if you look up at the top left, it will say, “Bank of America business credit card.” It’s literally a credit card, even though the bank uses the term credit line instead of credit limit. This is because 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, etc. are all looking for business credit. Now, most of you are looking for true business credit…simply writing a check and doing a deal. Not a convenience check, which is yet another thing these guys do. They’ll claim that you can write a check…but it’s a convenience check, which is more like a cash-advance check, not a true credit line. It’s a business credit instrument that is simply called a credit line by banks and financial institutions.
Another aspect that has changed since 2008 is the fact that mortgages require a ton of documentation. On the business credit side, they have completely cut out the act of using references to your business credit. The Dun & Bradstreet PAYDEX Score that was once valuable before 2008 no longer matters when it comes to measuring your business fundability™. You may be wondering why…and it’s because the old paradigm would use credit that was acquired for your business, just like vendor or retail credit. On the personal side, it’s what we call Tier 4, 40% junk cards. Dun & Bradstreet would record those, give you a score, and then offer you more credit. However, since 2008, not a single bank uses automatic underwriting criteria, which your PAYDEX score is not a part of. They just use your personal profile to establish both your credit worthiness or fundability™.
That all started not only with the new algorithms that FICO is coming out with, but when lenders started underwriting their business credit instruments as well. In an interview I previously had with David Smith from FICO, he said that when a business lender is deciding whether or not to lend to you, 80% of that funding decision is based on the personal profile of the principal for that business. The other 20% is based on the data points that match your personal profile. If my PBID (Personal Borrower Identity) is Merrill R. Chandler, but I have Merrill Chandler or Merrill Ray Chandler instead…that may be close but it’s still not a perfect match. They’re looking at who owns the business, and if that person is different from the principal of the business, you’re going to receive yellow flags, red flags, or even denials!Who you are is separate and distinct from who the business is.#GetFundable Click To Tweet
The whole point of adapting to the new paradigm is that—in the old paradigm—they are using terms that were only valid before the events of 2008. The other thing you have to watch out for is the use of the words “corporate credit.” In technical usage by all the banks and institutions, corporate credit is usually for institutions that have a value of $10 million or higher 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, or the chairman of the board of directors.
Please understand that none of this is your fault, because they try to make “corporate credit” sound like a cool new thing. Nonetheless, they aren’t going to give you corporate credit because in reality, it’s massive credit lines to use with your corporation that is worth $10 million, $50 million, or more. So if you hear them say something like, “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 would 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 more often than not do they report on your personal profile.
From Old To New
Now we are going to demonstrate how that old paradigm turned into what now makes you fundable as a business. The old paradigm is made up by all of the reasons why lenders wouldn’t lend to you anymore. For example, when I got $200,000 in unsecured stated income from the two credit lines from Chase back in 2007! But you have to do it differently now…which is why we are discussing the old way in comparison to the new way. Many of you know that I ask on a regular basis if you classify yourself as a business owner, or if you ever think of yourself as self-employed. You would not believe that 40% of people who come to my bootcamp have “self-employed” as their employer. It’s essential that you know why that isn’t serving your cause when going into business borrowing.
Do you in fact consider yourself an employed professional? Think about it this way…if you were to fill out an application right now that asks in a drop-down menu who you are and you can only pick one…what would you say? Which choice do you think 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. One option is if you come back and say, “I am employed by my own company.” And that’s okay! As long as you are the principal of the company, we want to separate you from being the owner or manager of the company.
Being the principal of the company is essential because business owners create a certain degree of uncertainty, resulting in them not a safe and reliable bet for business lenders. The same goes for individuals who say they are self-employed, because that term alone creates uncertainty. This is why there are certain variables that need to be discussed. In this environment, an employed professional is the safe and reliable option. Think of it this way—if you are an “employed professional,” the language itself tells lenders that your business is sufficiently funded and doing well enough for you to be employed there. You can have a W-2, 1099, or take disbursements as an owner. When you’re an employed professional (the principal of the business) you are far more fundable than if you are the owner of the business. Lenders look for borrowers who create conditions of trust. Not only that, but someone who is going to treat their money and funds with deference and respect.
Non-personal guarantees sound like a myth or a fairy tale now. Before 2008, that $200,000 I received 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, which can used the same as cash. It’s not like a Staples credit card that you can only shop at Staples with, or a Home Depot card that you can only use at Home Depot. There are numerous types. You can get cash cards that are not personally guaranteed…but for true cash lines, there is no such thing as not being on the line for it when there isn’t a personal guarantee. Instead, that comes in with credit cards, credit lines, charge cards, installment loans for business credit. Not personally guaranteed is also used for retail and gas cards.
Another option is to get a U-line. They’re not going to put you on the hook for a U-line account for ordering office supplies. You’re not going to be on the line for those. Vendor credit is your internet, phone service, web hosting, etc. You’re not on the line for those either, but the individuals who say they’re going to get you non-personally guaranteed credit lines are actually talking about what’s below that red line.
This is what you need to understand most. The old paradigm has that name for a reason…since it isn’t fundable and obviously doesn’t exist anymore. However, it’s still important to understand why it isn’t fundable. I’m going to use the example of an enterprising soul, since it represents the vast majority of the people that go to my bootcamps and the individuals reading this. It doesn’t matter what specific area you reside in—whether it’s having a note buying business, a buy and hold business for your rentals, a fix and flip, or even a franchise where you do private lending to other real estate investors. In the old paradigm, we thought that we had to get money or loans individually for each one of the businesses that we have. But the thing is…lenders don’t like lending to small businesses! I’ve told this story a dozen times, but it has become relevant once again!
At FICO World 2019…there was a panel of 5 or 6 lender representatives, along with the heads of underwriting for these lenders. They thought that only lenders were sitting in the audience, but little did they know…I was in the audience as well, representing borrowers. It was no problem, since they didn’t know I was there or who I am in general. But as I sat there, I noticed that they kept cracking jokes about when someone comes in looking for a $50K or $100K business loan, they would scatter like cockroaches. Yes, they would take your name and number down, but never follow up! This is because in that environment, anything under $1 million is a waste of their time because it requires full documentation at those institutions. They need to collect all the same documentation and complete all of the same work for $50,000 as they would for $5 million.
That’s why they don’t want to lend to your business. They’re not interested, and it’s a waste of their time to go through the same tiring process for a much lower yield. Even though $100K is a game changer for you and your business (since it is an amazing step towards success), they’re not interested in a borrower with that small of an amount.
The old paradigm—in the manual underwriting world—makes you (the owner of whatever type of business) the owner. This means they have to vet you and your business completely. But the problem this brings up is that business owners are not fundable in general. When you walk in there and tell them that you own a business and want a loan, the first thing they’ll ask for is your taxes, financials, and anything else they could possibly know to secure it. And if you don’t have everything on their list of requirements, they’re not going to lend to you. So make sure that you have all of your facts lined up!
It’s ridiculous, especially if you are aware of the new paradigm. Again, not only is being the business owner un-fundable, but being self-employed is as well. People usually bring this on themselves…until they actually start to learn what fundability™ really entails. You aren’t what you do. You’re not a real estate investor, a note investor, a business owner, a franchisee, etc. What you are in an entrepreneur!
You’ve chosen a wealth strategy to achieve your goals, your dreams, and your ‘why.’ If lenders see that you are an employed professional by your own, fundable organization…you will make their day! This is because you now fit into a completely different class than the other borrowers they hate working with. Unless you want $5 million or $10 million—and 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’ll love you. And again, 80% of their decision is based off of your personal profile, so they’ll approve or deny you based on that alone.
Next, they’re going to look to see if the entity is fundable. And by fundable, I mean whether or not it is a legitimate entity that matches the data points so that the principal and the business are congruent. To further what David Smith said, you have to optimize the principal’s profile for business credit approvals, and do things to the personal profile that’s going to pass muster in the automatic underwriting software.
Being the owner of your enterprise will make it a ‘client company.’ You could have one business, or you could have ten…but if you are the owner of at least one of them, you’re already dead in the water. Lenders love to lend to the genius and strategist behind the business…the person who knows how to make good decisions as 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
It’s essential that we cover all of the aspects of what the most fundable strategy is. For whatever type of organization you own, the Qualified Fundable Entity (QFE) has to not only be transparent, but a bank-facing entity as well. It also has to have viable ownership…and there is criteria to that. This may seem like skipping a stone across a massive lake, but that’s why I’m here to help. If you haven’t been to my bootcamp yet, go to GetFundableBootcamp.com. There, we’ll show you how to set one of these up!
A bank-facing entity means that instead of lending to a QFE, they’re lending to you behind the entity. Remember, you yourself are the 80% worth decision-making. But remember, it can’t be a holding company, it can’t be owned by any other entities, and it also can’t own any entity itself. Think of it as your asset protection—all holding companies, trusts, land trusts, and LLCs to hold your properties. If lenders were to ask for your books, they don’t want to see a bunch of assets, properties, rentals, or loan notes. Because if they do, they will go straight from automatic underwriting to manual underwriting, using those as security. We don’t want that! What we do want is for it to stay in the lane that is automatic underwriting.
Your entity also has to have a legitimate income, which means something that is paying points, interest, or monthly payments to the mortgage or otherwise. A lender in automatic underwriting isn’t going to count your mortgage payments as legitimate income because it’s not stable. If you can’t pay for any reason, lenders in automatic underwriting will want a full documentation. This is why if you want a $100,000 loan from one bank, they won’t want to go through this huge mess of evaluation your mortgage notes and longevity.
They won’t take rents as legitimate income either, since they don’t count it in automatic underwriting mode. When discussing the two lanes (automatic and manual) of underwriting…automatic is the sweet spot of funding! But on the other hand, manual underwriting can be difficult because they won’t want to complete all of this book work only to determine if they should give you $50,000 or $100,000. Those are rather small, so they don’t want to work hard for it. It won’t seem like a legitimate income for a lender, so it’s not worth it. With automatic underwriting, they won’t count anything because you’ll seem like a business owner that’s trying to prove-up…and they want actual proof. Instead, they want an employed professional whose profile they could simply examine, and then make the decision to give you money.
We’re going to discuss how we can create that type of profile. If you call every one of those types of business your ‘client,’ what does that make you? We need to split up this process…with the QFE on one side, and the strategist on the other. For example, if you are a real estate investor, you went to real estate school and obtained the skillset you needed to make you the strategist, the decision-maker, and the genius behind these deals (which are happening down in your clients).
Your client companies, your note company, your buy and hold, your fix-and-flip company, etc. is where you will execute your strategies. But first, we have to separate those client companies from you, the strategist, which is in the QFE. Now, you may be wondering how we would do this. In 2010, it was originally associated with the elections…but since then, it has had far-and-wide sweeping effects for a number of industries, including this one. Within that year, 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 distinctly separate from who the business is. So even though you are the owner of your client companies, they are separate from the strategist in the QFE. Think of the QFE as the strategy level, with all of the clients down beneath it. Separating you from your entities will open up the opportunity for you to treat those client companies as something separate from you, even if you are technically the shareholder, member, etc. of that LLC.
We can do this by converting non-usable profits into usable revenue for the QFE…by making you the strategist, consultant, management or advisor to all of those client companies. It doesn’t matter if you own them…they are still separate from the strategist. You’re the one making the decisions for every one of your income streams. All we’re doing is making the QFE embody your strategy!
The second we do that, we can automatically convert those profits from your notes business, your buy and hold, your fix and flips, etc. If you put those down on an application, they will want to see them. And if you convert that, each one of those clients will start paying consulting and management fees. Now, I’m not talking about property management…I’m talking about strategy. You are a strategist! If they start paying you fees, then all of the Tier 1 and Tier 2 banks—and everyone else who is in the lending business—will love that model because they don’t have to sit down and tirelessly bet every single one of your deals! You are billing your clients for consulting fees, management fees, marketing fees, and advisory fees, putting you, as the strategist, up above…with the clients below. Every single time they pay you a fee, your income becomes more and more massively legitimate to lenders.
Since there are no assets, you’re now an income-and-expense type of business, and lenders will be more than happy to lend to that perfect model—even without requiring income verification! This model shows that you are not only a fundable, employed professional, but that you are personally fundable as well. Your business model will show that you are the sole strategist and genius being paid by other companies…even if you own them! You are not your deals, and you are not your businesses. The main point here is that we have to know what is business credit and what is not business credit. You become fundable the second you have a fundable personal profile…and your entity becomes fundable when you separate the strategist level from the client level.
If you would like to figure out how this applies to you in particular, go to GetFundableBootcamp.com. It’s a two-day dive into personal and business fundability™! If you know the rules of the game, you’ll then know how to play it in a masterful way. That is my hope for you and your loved ones…that you take whatever you’re learning and continue to walk with me down this fundability™ path. You can also get a copy of the book at GetFundableBook.com. It’s free! You only have to cover the shipping costs, and inform me of where to send it. Keep going in your journey to success!
- David Smith – previous episode
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