Silent partner for credit purposes?

Question

An associate says he added a partner into his LLC because she had a nearly perfect credit score, and became guaranteer on business loans and commercial real estate, effectively making it super easy for him to achieve things he normally couldn't before, due to his own credit being average.

I'm the guaranteer on my business accounts, and intend to finance some commercial RE this spring.  Would it be an advantage to find a partner with a perfect credit score?  Or is this a rookie/sketchy move?

J. Martin · Answer

I might disagree slightly, and say this depends. And here's why:

1) Some people have VERY deep pockets/income/etc. Some of these partners could sign on millions of dollars in loans, without huge ownership distributions, and still provide a lot of support - especially if the CRE deals are strong. Partially because...

2) If the strong partner guarantees the deal rather than signs directly, it is a contingent liability rather than direct liability. It is often-times not directly underwritten as debt as long as the deal is paying for itself.. Especially if the guarantor is very strong, has CF, liquidity, NW, etc..

3) With strong enough guarantor(s), you may be able to get a non-recourse loan for another 25-50bp. This avoids the debt going on anyone's credit. Ironically, you need a very strong partner for the Bank to have enough confidence to not make any natural person sign.. But experience will probably be important to them too.. With this strategy, you can finance as much as you can put downpayments on, although they might want 25-30% down for non-recourse.

Jon Klaus · Answer

"Oh....a technique that I often share with some of my clients that have good credit, is to transfer their consumer debt from their personal file over to a new business. It's easy to do and will lower your personal DTI ."

How do you do this, Vinny?

Duncan Taylor · Answer

This has been an awesome thread for me!

While I have not dealt with typical bank financing in over 25 years and don't expect to in the future, I do like learning new things. And I have in this thread.

Bryan Hancock · Answer

It is common in many commercial transactions for a handful of parties to provide the bulk of the equity required in the transaction and for other parties to provide the bulk of the support for the debt.  This can be viewed as "credit support" for the deal and one can value the debt in a different manner than the value assigned to equity.  Developers frequently raise the bulk of the equity capital, supply some of their own, and procure the financing for projects; often guaranteeing the debt.

Instead of fully marrying one individual to your LLC that has a solid balance sheet to provide this support you may consider JVing with them on each individual transaction instead.  As has been discussed above these items will be considered contingent liabilities and will not be present on one's credit report.  They should, however, be disclosed via your PFS when you apply for a CRE loan.  Stronger CRE lenders generally ask for a schedule that demonstrates your overall contingent liabilities, how long the project has been in process, the total amount drawn against the loan commitment, etc.

Ray Alcorn's Dealmaker's Guide To Commercial Real Estate has one of the best chapters I have ever ready on preparing personal financial statements.  There is a bit of gamesmanship to it and there is art to how it is demonstrated to lenders.  Since every lender has their own way of underwriting a file (global cash flow, creditworthiness, etc.) you generally want to disclose the proper amount and only more if it is requested.

Duncan Taylor · Answer

If your associated added a person to the LLC to use her credit score, this is not a long term sustainable strategy.

Once the loan is made, it will show up on her credit report. If her income does not increase, her overall DTI ratio will climb, reducing her score.

If she is not receiving any (or very little) income or profit distribution from the LLC, and things go south on the loan, things could get very ugly, very fast for your associate if material information was withheld on the loan application.

I wouldn't add a partner just for the credit score. Any benefit received from that perfect score is temporary at best.

Vinny Gaines · Answer

From what I know about business credit...and this is something that I do regularly, your credit report will only reflect the inquiries made when applying for the business loan. HOWEVER, you really have to know which banks to go to because some of them will add the business tradeline to a consumer credit report. BOA is a good bank that keeps business transactions and credit away from the PG's personal file.

I'm in the middle of handling a transaction now that will allow a 700+ credit prospect to acquire up to 200k in business financing.

Oh....a technique that I often share with some of my clients that have good credit, is to transfer their consumer debt from their personal file over to a new business. It's easy to do and will lower your personal DTI .

Mark Moses · Answer

I wish I had a credit partner. They will mirror the credit partners credit score on the business and you can get funding that way. The person becomes part of your business and you can pay them a percentage of approved credit lines. The only way things can go south for the credit partner is if you stop paying the lines of credit, then it will reflect on their credit. Otherwise it will not, as it is credit for the business. The strategy would be to pay the loan off as quickly as possible and remove the partner from the business. A credit partner would not be needed for me if I didn't get beat up in the real estate bubble. Not only did I loose all of my money but my great credit score was destroyed. And they just got away with it.

Corey Davis · Answer

J. Martin Yes, that was the info I was given.  Googling a ton of things right now, but can't seem to find anyone who has any actual experience with this.

Corey Davis · Answer

J. Martin awesome!  Thank you!  Any advice as to how which of those two routes would be more desirable to banks?

@Bryan Hancock that's really great info!  And I've been looking for reading material, I will check out the book!

Corey Davis · Answer

After this thread I managed to speak face to face with some seasoned financial advisors.  It's not uncommon for an LLC to acquire multiple "credit partners"  for huge multi million dollar projects.

I'm in the multi thousand dollar range, ;) but I'm going to try and follow the same structure.

Obviously, the benefits of having a credit partner that understands real estate investing sounds like the right move, though I've been advised to find non real estate type investors, so that they stay focused on their position within the company, instead of becoming involved in the real estate aspect, therefore keeping the number of "cooks in the kitchen" manageable.

I get that, but I'm on the fence.  I can also see great potential in having a credit partner with a grasp on what I'm doing and why.

Any thoughts from the community?

Silent partner for credit purposes?

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