The two-part equation of underwriting is the ability to pay and the willingness to pay. A strong personal credit score shows that someone starting a business has a willingness to pay. Ability to pay is not really under their complete control; they are going into a new business. It’ll be dependent on how that business is run, the economic climate of where it is, and other associated factors.
For those starting up their business, make sure that you are actually serious about being in business. We’ve gotten requests from people who don’t even have a business license or a business checking account. Here’s the thing that’s important about underwriting a start-up: If it’s a pure start-up – sole proprietorship, with no one else involved – how is it paying the bills while the company is ramping up? Do the proprietors have pre-existing income?
Business plans, projections, resumes showing past experience – all these things are very helpful. We look for that continuity. Once, we had a dolphin trainer who wanted to open up a candy shop. What does a dolphin trainer know about candy? If somebody’s looking to open a machine shop, it’s best that he wasn’t a baker before that. We never really got a straight answer from the dolphin trainer; I think he was trying to hide the fact that it was for his wife and he was the one with good credit.
Make sure that you know your personal credit and how it is reflected. lf you don’t have a certain credit score – usually a 650 or higher – it’s very difficult to get a business loan for a start-up. It’s 90 percent of the decision because it’s the only thing that gives us information as to who’s going to run this company. With a start-up, there may be willingness to pay from the person who’s starting this company, as reflected in his personal credit report, but ability to pay is not known, so there is a higher rate.
However, start-ups can offset that higher rate because they can write off all of their payments. Section 179 lets you claim the asset as an asset and you’re depreciating it, and it appears on your balance sheet as a debt. Off-the-balance-sheet accounting would say you do not include it as an asset, and you write it off as an expense. The expense would simply be the payments, including the interest, which is allowed under IRS Rental or Leasing. This really helps mitigate the high
rate because at the end of the year you net a much better picture. It’s important that, during that time, the payment itself won’t be intrusive to operating your business. If you think the payment will prove too difficult to handle, you probably shouldn’t do a lease because it obviously increases your chances of default.