There are innumerable ways you can fill out an application that actually tells a lender, “Don’t lend to me.” In this episode, Merrill Chandler and Brad Burnett talk about how to clone your business so that it fits underwriter guidelines. Underwriter guidelines are designed to prove that you’ve filled out your application correctly, that you shaped your business correctly, and that you are in alignment with their approval guidelines. Avoid unwittingly and unknowingly killing your fundability on the hope of being successful in business. Join us on this episode today.
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How To Fit Underwriter Guidelines with Guest Co-Host Brad Burnett
On this episode, we’re going to go in and cover one of the biggest mistakes entrepreneurs, real estate investors of all types and business owners make. Get ready for an exciting episode. We’re going to come back and we’re going to dive deep into that on this episode. Merrill, as we dive into this episode, we want to talk about one of the biggest mistakes that real estate investors make or business owners of any type, entrepreneurs or small business owners. That is how they name their business and the multiple, little side shoots like NAICS codes, SIC and all of the different things that they unwittingly and unknowingly do to kill their fundability on the hope of being successful in business.
A perfect way to start this out is that there are innumerable ways. You listed several of them. There are innumerable ways you can fill out an application. You think you’re doing a superstar job of filling up the application. In truth you’re telling the lender, “Don’t lend to me.” They won’t because you told them with the data you put it on your applications to not lend to them. This whole episode is about how to clone your business so that it fits underwriter guidelines. Underwriter guidelines are designed to prove you if you fill out your application correctly, if you shaped your business correctly, and if you are in alignment with their approval guidelines.
Merrill brings up the word, “How you clone it.” The challenge that most of our clients have run up against truly is having an entity that they are doing everything right in. They might be making eight figures a year for several years and they walk in to try to get the most inexpensive money because why do we always talk about bank money? Because it’s the most inexpensive money.
It’s not hard money.
You don’t have to give up half of your deal. You don’t have to give up equity in your business. It’s the most available money. If we make small little errors, we’re never going to be able to get our hands on that money. It starts right at the outset because in 2002 or 2001, I was starting to look at getting into my investing career, my investing path. The asset protection company I was working with is top-notch for that very thing. I’ll give them a shout out. It’s Anderson Law.
We have dozens if not hundreds of mutual clients.
They’re awesome at what they do when they create your asset protection but I didn’t know anything about the concept of fundability because I was taught that when you’re going into real estate investing, these are your sources. You always have to use alternative sources of funding if you want to be successful in real estate. I bought into that like hook, line and sinker. They got me.
For generations, real estate investors couldn’t get bank money because they didn’t know the rules of the game. We all bought into it. I did this exact same thing.Funding Secret #2: When you clone a qualified funding entity, automatic underwriting software is designed to approve you. Click To Tweet
With that, I never worried about the concept of fundability. Fundability wasn’t even a concept back then. Let’s start there. I didn’t have even an idea about that and because it’s not their business model, their job as the attorneys doing my asset protection was purely to protect my portfolio and to protect my assets. I had nothing to do with being fundable for banking. I didn’t ask questions. Come to find out, I named my first business KIB Capital Management. The K was for Kenzie, the I was for Isabelle, the B was for Burnett. Those are my daughters. I named the business and I thought it was cool in capital management and had no idea that because I named it that, I was immediately not fundable.
On the application, a lender would look at that and the current AUS, automatic underwriting software would look at it and see a red flag word and trigger it for automatic denial.
It’s an automatic denial just because of the name. Most of us haven’t even dived into the industries yet, all these high-risk industries. You can have high-risk words. We call them red flag words because they literally pull up red flags.
It’s a red flag in the AUS and they will literally go, “Denied.” Too many yellow flags equal a denial as well.
It’s like in soccer. If you’re a soccer fan, if you get two yellow cards, it’s a red card, You’re out of the game and you might miss the next one. I don’t know all the rules. I don’t play soccer, but it’s the same concept. You can’t have too many of those or you’re going to get kicked out of the game. I am a fan of soccer, I just don’t pay attention to all of the rules.
It’s not true with being fundable. The rules of this game, you got to know all of them because there are landmines every step of the way. They’re put down there because the underwriting software is designed to protect lender money, but at the same time approve the people who can get through the landmine. How would you like to have a path and a minesweeper that allows you to look at every single landmine, dodge it, mark it and never step on a landmine again? That’s what our whole show us is about. It’s making sure that you know what landmines are there, how to mark them, then how to literally navigate those mines all the way to fundability.
Now we know that having the wrong name is a landmine. Merrill, the people that we’re helping, how do they have a fundable entity?
First things first, one of the keys for becoming fundable is to understand that lenders do not like to lend a business. I know this sounds like a revelation, but they don’t like lending to businesses. They like lending to the owners of businesses. That’s why in every extension of credit, you have to personally guarantee it because they’re checking you out. The way you treat other people’s money on your personal credit profile is the way they know they’re going to extrapolate that and say they’re going to treat business money the exact same way.
To take that a step further, 80% of a small business entrepreneurial business approval is going to come from the personal profile. It is about how you treat other people’s money, but you also have to have the right profile to be approved for business. It’s not just, “I’ve got my Target card. I pay them on time and I treat their money with respect.” If I’m going to get approved for business, I got to prove that I can handle business money.
Business money is real money. As you said, you’re not going to get a $50,000 business line of credit on your home depot reputation. There are peers in lending and no one’s going to give you $50,000 either if the highest limit of your credit card is $5,000 or $10,000. It’s not going to happen because they need to know how you treat a $20,000 or $30,000 or $50,000 set of credit limits. The way we navigate these waters, we’re always presuming that you know the rules and that’s what this whole show is to be.
Episode 500 is going to be another rule. I love people who are going to be bingeing our thing because they’re like, “I need more.” I have a Matrix reference. Remember when Neo gets plugged in and he’s like, “I know Kung Fu.” You’re like, “This is amazing. I need more.” That’s what this podcast is when it comes to creating funding opportunities for you. Our ultimate game plan, not just this podcast but for you as a listener, as a subscriber, as a fan of the podcast, is to create every little nuance on your personal credit profile and the shape your business takes so that you are fundable in every way.
To swing back around to the original question, the form of your business, they don’t want to fund your deals. That’s not going to happen. Real estate, notes, entrepreneurs, we have clients who own gyms. They don’t want to fund a gym. Memberships are too squirrely, but they will fund the owner of the gym. They will fund the person behind the real estate deals. This is a revelation. We’re on our third episode and we are telling you the secrets of the fricking funding universe. You have to understand the fundamentals of this universe says that you are different than your deals.
Your deals are not going to be fundable without all the documentation because they got to know how your business works and all of these things. If you focus on becoming a fundable personal, a borrower profile, first that personal profile, they look at how you treat money. They look at all of the 40 characteristics and that’s when they approve you without documentation, without tax returns, because they trust the data and we shape that data. The first principle of cloning your fundable entity is you’ve got to know what they’re willing to fund and it’s not your business. It is you behind the business. Is that a fair way to say it?
It’s 100% fair way to say it. Now, let’s pretend everybody is fundable behind the business.
You as a person are backstopping the loans that they’re willing to lend to you.It’s weird what you can do when you know the rules of the game. Click To Tweet
The first thing you have to do is you have to have a name that’s going to pass because mine wouldn’t. You have to have a name that doesn’t have a red flag word in it, but you also have to be an entity because your name’s not enough because the second thing they‘re going to check is, what is your industry? What is the purpose of your business? If it says Are You F*Able Consulting, but then it says the purpose is real estate investing, you’re out.
They find that out through what’s called a SIC or NAICS code. SIC is the older version. It’s like twenty years old. Here’s how archaic business credit reporting is, they still use the twenty-year-old SIC code that stands for Standard Industrial Classification. They’re classifying your industry. The NAICS code is North American Industry Classification System. That’s newer and both of them are on all the current business credit reports, but here’s the thing. If you don’t declare what you are in your Dun & Bradstreet file, in your business Experian credit file and your business Equifax credit file, when you fill out an application, here’s what’s bizarre. They read your name and then identify you as a class because you haven’t declared it.
The second they do that for you, until you change it and we’ll talk about how that too, you’re labeled and that is a non-fundable SIC code, real estate investing. If the SBA doesn’t lend to it, lenders aren’t going to lend to it. With the Small Business Administration, your SIC code is the very thing that describes your purpose and if you haven’t put that into and made it right in your documentation, you’re going to get denied flat out and your name will reveal it. First, you got to have a fundable name of an entity, a fundable business type. There are numerous versions of fundable entities. We got that list from Dun & Bradstreet.
The score development team at FICO told us, “Go talk to Dun & Bradstreet.” We asked, “What do you classify as a fundable a type of business?” Then they’re like, “We get the data and measure it from Dun & Bradstreet. You should go ask them.” Remember, we are kittens in the woods. This our first FICO World. I don’t know about anything that FICO is doing. We just knew that what we had created and reverse engineered was working. Apparently, it’s working well enough that they made me sign an NDA so we didn’t share too much. We went out to the Dun & Bradstreet kiosk and asked, “Can you give us the list of fundable entities?” They said, “We don’t have a list like number one, number two, number three.” We can give you a list of the percentages funded.”
They sent us an Excel spreadsheet that was like 10,000 cells long of the types of these SIC codes that were fundable and not fundable. It’s weird what you can do when you know the rules of the game. We began to build that as part of our system to create fundable borrowers. Again, every one of these things we’re talking about ends up in an episode. I can’t share with you what I know from many years in a single episode, but I’m telling you right now, there is a formula. We call it the million-dollar funding formula and the key thing for your business is having the right name, the right SIC, NAICS code, business addresses and making sure there are no red flags on business reporting.
If I’m getting started, I’m listening to this show, I’m like, “That’s great news. I’m going to name my business right,” and I might even go to your Facebook page and ask a question like, “What’s a good name?” I might do something like that. Then I go, “Okay,” but I’m just getting started. I need to form an entity and I can do that. This is my disclaimer. We’re not your asset protection attorneys. We’re not your legal counselor or whatever. Talk to them about how you set up your entity. The reality is you go to the Secretary of State and talk to them. I set up my entity, I’ve named it right. I’ve got my SIC code correct. I can run to the bank and I can get funding.
Thank you for playing because the next feature of once we have all the data points, remember how we said that 80% of funding comes from your personal profile? Where does the other 20% come from? People are like, “It’s on my business credit. We’re hitting PAYDEX soon. We can’t get into PAYDEX now, but it’s a dinosaur. It’s not a thing. What are they looking at? What is the 20%? You’re not going to believe me, but here you go. They’re looking at your data points. They’re looking for that in NAICS code, they’re looking for the SIC, they’re looking for a fundable business address, they’re looking for the who is applying it, who is the owner and does that data all sync up?
That 20% is not based on trade lines and business credit cards and any other business loans. FICO told us that business credit reporting today is what personal credit reporting was in the mid-’80s. It’s horrible. They don’t count on it for data. They count on it for identity and fundable data points for your business. That’s where that 20% comes in. Are you still fundable? Can you walk in and go, “I had to throw that in because that was the last little piece?” With that data and an optimized profile, we haven’t even covered what a business optimized profile is, just that you need one, you build the relationship with the bank using the correct business form, the correct title, all of the things that 20% represents. Then you start building a business relationship with a bank.
If I do all of those things and I’m a brand new business, I do what you said, then I can walk into the bank and get a business line of credit?
Yes. If you’ve done all those things.
Are you sure?
Fire away. Tell me what I’m missing.
My business is brand new. I was trying to walk him down the path. It’s got to be aged. It’s got to be seasoned. It has to be old enough.
I’m already making those assumptions. Yes, seasoning. They want to see three years’ worth of not tax returns, but three years on the Secretary of State or Department of Corporations. If we’re spectacular, we can make a fundable at 24 months but the laydowns, if there is such a thing in this business, are at 36 months. There are a couple of ways to skin that cat. You can modify a current company. You can do a shelf company and you can do even a new company.
Start a new company and age it.
It’s right and it depends on how long it takes for your personal profile. We have people to us still, “I’m never going to get out of helping people who have the oopsies on their personal profiles.Business credit reporting today is what personal credit reporting was in mid 80s. Click To Tweet
Bad things happen to good people. It’s a fact of life. It hasn’t changed as long as I had known.
Bad things happen to bad people too who go to prison for it. The bottom line is you can make an entity fundable in a number of ways in that seasoning process, but as we go through that, you have to have certain markers and those markers, we are able to help you with less than perfect credit and optimize around any derogatory accounts. We have accounts. We have clients who have 800 plus credit profiles with derogatory indicators on their files for a number of reasons. It’s another episode. Should we tell them about our boot camp so they don’t have to listen to the 700 episodes?
It’s FundingHackers.com, you can check it out. One of the things to bring up right here is because you mentioned 800 plus profile. Your credit score is the fourth item of importance when it comes to fundability. Merrill uses the reference in basketball. One of these days, we’re going to play a drinking game when Merrill brings up a new metaphor because of kittens in the woods? That was a new one. It’ll be a drinking game. We’ll do shots when he brings his metaphor.
You can now use kittens in the woods as an official metaphor.
Your credit score, it’s the scoreboard. It doesn’t tell you any details of the game. It doesn’t tell you who scored. It’s the scoreboard.
Of the entire team and game, not the individual players.
You’ll notice we rarely make that reference, but it’s a known reference. People are tied to that credit score. Credit Karma is doing a great job of getting people to be aware of their credit, but they’re doing a horrible job of reality. That’s up for another day.
That’s an entire episode. Keep reading because we’re going to take down Credit Karma.
It’s about aging. I wanted to tie it back to that. If you think about it again, take a step back. How do bankers lend? What do they want to do? They want to protect their money. They want to make sure they get paid back. They want to make that money on that money. In that as a process, if you have an entity that’s two years old, you can come in and we’ll talk about how you can crank up the optimization process to be more fundable so you get bigger loan approval. If nothing else, if you did the exact same things and had a three-year-old business, you will get approved for more.
That’s the key. At three years and you’ve done everything else, remember, you can do two 24 months, it’s that you have to have tightened your things up hardcore to be out for them to be able to go, “I’ll risk this money on a 24-month business but most people fail within three years.” They want to see at least that number from your founding date.
I can see the fact. I was playing a little bit, but in your 20%, aging is calculated in. That’s an automatic process.
How old is your funding entity? Notice the language here. We don’t say, “How old is your business?” We’re saying, “How old is your funding entity?” Because we want you to be the funding entity encased in a legal entity called an LLC or single shareholder incorporation. We want you to be the funding entity and you wear this little thing called an LLC around you. That’s what fundable. You’re never going to hear us fund your business. We’re going to say get you funded and then you fund your businesses.
That I think is a slippery slope. When he’s saying you funding you, it’s that 80% concept. You still have to have a legal, moral and ethical business that you are backing. He said it ten times on this episode, a hundred times in all of them and it’s that you are fundable but it’s in a legal, viable business. That’s what the age indicates. Most of us who are in business, even starting out as entrepreneurs, we know that small businesses, entrepreneurial businesses go out of business. They fail. We know that.
What’s the biggest reason for failure?
Lack of capital. If you’ve been in business for 24 months, you’re starting to prove longevity. All of a sudden, you’re a bit more viable as a business. You have revenues coming in, you have the longevity, you have the years and the age behind you. Five years, it’s even better. If nothing else, go start an LLC today. Name it right and age that.
I’m exactly where he’s going with this. I want to put huge explanation points. You’re sitting here going, “I need money now.” I’m like, “What’d you do yesterday and the day before in the day?” Don’t get greedy. Do it right. Pull all of this together because two, three years is coming whether you do anything about it or not. There are ways to advance all of this. There are hacks to all of this. We can’t cover every act in every episode for every subject matter. Just know, keep listening and accrue all of this information.Fundability starts with the quality of the deal. Hard money lenders and private lenders are going to lend to you if the deal is smart. Click To Tweet
If you are in a position where you need money right now, there are two lanes we can run down here. This is the fork in the road. One, go to our boot camp because we’ll teach you everything in two days. By the time you’re listening to this, we might have another boot camp, who knows because we are dedicated to teaching this information. We also get that as business owners, as real estate investors, sometimes we have to move fast because I’ve never known a real estate investor who wasn’t like, “I could use every dime of the money you’re talking about yesterday.” All of us could. All of us can. The other path is to go to the boot camp, but the other path on its road is if you’re not able to use your alternative lending sources, you’re not going to get bank money. Don’t come to us and go, “I need money now.” When you need money fast, that’s what alternative lending sources are for. That’s what they’re designed to be for. If you can’t get that money, ask yourself why, and that’s the same reason you’re not going to get the money when you come to us.
Fundability starts with the quality of the deal and the intelligence of you doing the deal. Hard money lenders, private lenders are going to lend to you if the deal is smart. If the deal is smart, then what we’re doing is we’re codifying all of that intelligence, all of that experience and all of your ability inside of this funding entity. Then we’re going to codify that, take it to the bank and they’re going to fund you. It’s cheaper, faster money. You have to understand, you’ve got to start somewhere. This is a long–term play, but it is a permanent–for–the–rest–of–your–lifetime play. I’ve been doing this for 25 years and still acquiring more credit lines.
I’ll throw this out there. I just got another $75,000 from Wells Fargo, $65,000 in the credit line and $10,000 in the credit card for a total of $75,000 by following the very rules I’m telling you. My high-risk entity was Echelon Credit Advisors. That’s where we worked originally before we converted to CreditSense. Echelon Credit Advisors, do you know what it’s called now? It’s called Echelon Management Advisors. It’s not a whole lot of difference in the aging and all the other stuff, but now I’ve created a model where I am centering my fundability around me and my skillset not doing credit.
I want to go back to one thing Merrill, you made the reference, this is the long game. Merrill said it already. I’ll reemphasize it. You’re going to have two years pass no matter what, why not start the process of putting in place not only a long–term play, but a renewable play? Because one of the things that are annoying for me when I was knee-deep in doing flips at the time was every hard money loan I got, I had to go get another one. I had to pay off, I had to requalify. I get that you build relationships with these guys and they start to trust you and all of that. I understand that entire process, trust me. From private lending to splitting deals to all of it, I get it, but imagine if you didn’t have to do that. Imagine if you had that same money resource and as soon as you got your deal taken care of, you paid off that money resource and it was replenished to 100% and then you could access it again immediately. You didn’t have to go out and submit an application and reapply. That is what this is about, being able to get that type of access.
It’s #WriteACheckDoADeal because that’s what the business lines of credit and or the commercial loans if you can use all the money at the same time. The renewable resource is these business lines of credit to the tune of every bank will go up to, especially when you know what you’re doing with the banks, they’ll go up to a hundred thousand dollars in unsecured and stated income at these lowest possible rates.
If you really know what you’re doing, you could get $500,000.
Go to FundingHackers.com, watch Teresa’s story and they will tell you how to do it. The issue is that you’re writing a check and doing a deal over and over again. Automatic underwriting guidelines will tell you that every time you pay it off, you’re accumulating points because you use it intelligently in a way that we teach you how. It’s one of the rules of the game. When you use the line, that’s when you get those automatic limit increases. It happens because they want to give you more money because you’re treating their money within their underwriting guidelines. They feel safe. They want to give you as much up to $500,000, $670,000 for Derek and Ayesha. It‘s all about the rules and this episode is about shaping your business profile so that you’re not telling them no. Those are the biggest land mines that you’re currently stepping on, “I’m a real estate investor. I need real estate money.” You go to Chase or Wells or P&C and they’re like that guy rolling over on the floor laughing at you.
You go in and you have this incredible business and the loan officers are chomping at the bit because they get paid when they write a loan and they are like, “We got you covered. Let’s go golfing. You and I were going to be a buddy. Let’s go to lunch. What else can I do for you?” The underwriter gets the paperwork and goes, “No. You are denied,” with a big stamp on it. This brings up an interesting point. I appreciate that Merrill brought it back to cloning the business entity because you can see how interwoven every single piece is and all leads. One thing, it’s not an island in and of itself. It is also can be integrated. It’s like the rabbit condominium complex.
This is the rabbit condo hole, but we’re your guys. We got you.
That’s why we’re not going to stop after this episode. We‘re going to keep it on. Go to FundingHackers.com. Go listen to the other episodes. Download us, subscribe to us. We’re going to keep bringing you this level of information and make sure you can be fundable and so you can get the money to do what you want to do. Anything else, Merrill on cloning and entity? I think we covered it.
I would love to clone me so I can do this all day, teach and preach the gospel of fundability and have our team, have all the resources all the time. Have a spectacular day.