What Business Entity Do Lenders Of Capital Prefer?

I routinely receive questions from entrepreneurs who are either on my telephone seminars, on my Webinars, or who just write in asking for help. I dedicate these blog entries to all entrepreneurs who are looking for capital, whether debt or equity, and need some assistance in succeeding with their efforts. I'd like to address a few questions that entrepreneurs send to me.

Question: What business entity do lenders of capital prefer?

Answer: Lenders are not terribly concerned, in general, about the type of entity that you create for the purpose of funding your project. The reason that this is not a big issue is that almost all lenders and bankers require a personal guarantee of any assets that they provide to you. In the old days (20 years ago or more) the concept of "signature credit" was common and readily available. Now, the concept of "signature credit" is very different. Banks have been burned, lenders have lost money, and the world of finance has gotten much smarter.

Unless you are operating a public company or a very significant private company, personal guarantees are the norm. There are different kinds of personal guarantees however.

First, there is the guarantee against fraud. If somebody is factoring your invoices, meaning that they're buying your invoices and advancing the money against them, they want to make sure that you're not writing phony invoices and creating any kind of a fraud. In factoring situations, the factor generally buys the invoices without recourse (in other words, no charge back to you if you they can't collect.) If they agree to a non-recourse purchase, they're especially concerned about you creating phony invoices. Therefore, a personal guarantee against fraud would be required.

In other situations, they simply want a personal guarantee that says if your corporation, your partnership, your LLC or other entity fails to make the proper payments, and you close it down, that you personally stand behind it. The banks got burned so badly in the last many years that they no longer are willing to provide unguaranteed credit to corporations that are nominal in size, and nominal goes all the way up to $20M or more per year in revenue. Beyond this level, banks start to feel comfortable that it is a legitimate business that stands on its own two feet without regard to the owner or the major shareholders as primary protectors of the entity – and secondary source of repayment.

So as you're going out to raise capital so that you can build a great business and propel yourself into the world of entrepreneurship, understand that borrowing money is serious business. The entity type that you raise money into is less important when you're looking for money than the way that you intend to use it - you must demonstrate a gainful purpose with a strong plan for repayment.

To finish, however, equity is a different discussion. If you're raising equity capital, the size and nature of the structure of the entity does become important, but more about that next time.

About Joel G. Block

Well known in the business community, Joel Block is a best selling author, speaker, and business strategist. Frequently a principal in his transactions, Joel has raised tens of millions of equity dollars for his ventures, which have included real estate syndications and privately held businesses.

Joel’s career is highlighted by the launch of a financial publishing company which he grew nationwide and later sold to the Los Angeles Times. More recently, Joel works with scientists, engineers, technologists and others to help them optimize their entrepreneurial opportunities. Would you like to get a private phone consultation with Joel? Visit www.joelblock.com/capital for details.

"Joel is a master at getting you to see things in a different way to grow your business."   -Betty Cope, Realtor and Business Owner

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