Corporate Borrowing

by Mr. Cheap

When my friend and I bought a building, we set up a corporation to purchase it. Our thinking was to have the limited liability that the corporation would provide, as well as get the preferred corporate taxation.

We’ve recently run into some cash flow issues (perhaps that’ll be a future post) and my partner set up a loan with one of the major banks. The bank wants us to fill out a form with our personal financial data.

My response, when I saw this, was that since the CORPORATION is borrowing the money, the lending decision should be made based on the CORPORATION as an individual, not us. To my mind, if we provide our personal details, we’re clearly going to be guaranteeing the debt (which seems to undermine a lot of the value a corporation is supposed to provide).

My partner insists that this is how things work for small corporations and that no lender will loan us any amount based on the corporate assets (which I believe comfortable exceed our current debt level). I think that the corporation should be able to borrow money itself (although obviously a smaller amount then it could borrow if we were acting as guarantors).

Do any of our hyper-intelligent readers know which of us is right (ideally with a link to “official information” so the victor can rub the loser’s nose in it)?

Secondly, if banks are perhaps more conservative lenders, who should we be talking to in order to arrange corporate financing without the personal guarantee? All the corporate lending websites that turn up on Google look pretty dodgy. I don’t think a mortgage broker would be the person to talk to, but I can’t really think of who else to contact…

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