My standard pre-qualifying statement is that there are no absolute answers to offer to business financing questions, but that being said…
Being incorporated does not have much impact on business financing nor does it protect you very much.
I had a call today from a service company that just got incorporated a couple days ago and was looking for prime plus one business financing for the new business, without any real security being offered or any guarantees of any sort.
Its not uncommon that business owners think that 1) being incorporated gives them greater access to capital; and 2) that financing through a corporation will reduce their personal liability. Both of these statements tend to rarely be true.
Yes, being incorporated demonstrates a certain level of stability and continuity. But when it comes to business financing, especially debt financing, a lender doesn’t care how many corporations you have set up, or how you have arranged ownership to guard against risk. For the most part, everything is looked as being in one basket, whether its inside a corp, or outside, spread out over multiple corps, or buried deep in a vertically integrated corporate structure.
The basic business rule for acquiring debt financing is that the lender needs to be sufficiently secured by marketable assets. If the security ratio is thin, then a guarantee or surety of some form will also be required. If the corporation has sufficient retained earning to support the required level of guarantee, then the liability of the financing facility will be limited to the corporation.
But if the retained earnings are insufficient to cover the guarantee or covenant, then personal guarantees are required. Its really all about math and coverage ratios. Corporate structure is basically irrelevant.
Business owners don’t like to hear that and usually say something like “why did I incorporate if I can’t limit my liability?” My answer would be if the only reason you incorporated was to avoid high ratio debt liability, then I’m not sure why you did either. However, most business owners incorporate for a whole host of reasons of which liability protection is only one.
As an incorporated business, you should always try to negotiate personal liability out of the terms of a credit facility, and even if you have to provide personal or corporate guarantees, you should also continually work to reduce them over time as your debt level is reduced.
Otherwise, its just about the numbers.