Heavier borrowing through a company?

W

WebBoard

Guest
From: Wei Ng


Hi!

I've just heard of this concept where you can borrow heavily through many different companies, and would like to seek some advice/opinion from those who have done it.

Basically it's straightforward- borrow through a company of which you are a director, and you have to personally guarantee the loans. The amount that the company can borrow will depend on your income as a director. When company A is maxed out, you simply replicate the structure by moving to company B & repeat the process.

The theory is that since you are only acting as a guarantor to the loan, this is not recorded against your personal credit history, so when you move to company B, there is nothing in your credit history to stop you from repeating the process.

I know this sounds extremely risky, but if all the properties are cash positive from day one, and I have a huge buffer to cater for unforseen circumstances, I don't see what can go wrong.

Would love to hear your comments/criticisms. Thanx!


Cheers
Wei
 
Last edited by a moderator:
Reply: 1
From: Paul Zagoridis


1) You are required on most loan application to declare contingent liabilities.

2) Guarantors often get a CRAA enquiry - Rolf may be able to confirm this.

3) non-disclosure can lead to criminal charges if it goes pear-shaped. Why risk it?

4) Directors fees are taxable income and the company must have cash flow in order to pay them. So if you have a profitable company, then setting up fake structures becomes unnecessary. Banks see these companies as in the real estate investment business. Different criteria apply.

Regards

PaulZag
Dreamspinner
WealthEsteem :: Psychology of the Deal
http://www.wealthesteem.org/
 
Last edited by a moderator:
W

WebBoard

Guest
Reply: 1.1
From: Wei Ng


Paul,

Thanx for the input. Here are some further thoughts:

1) Regarding the loan application- isn’t the company the applicant rather than the director? I figured that since the director is only a guarantor, the “contingent liabilities” bit is not relevant- ie. the director has contingent liabilities, but the actual applicant (the company) does not.

2) I was a bit concerned about having multiple enquiries on my personal file as well, but I guess a few enquiries should not matter. By the time I get enough enquiries to raise a few eyebrows, we should be able to move into commercial lending at that stage, I believe. My mortgage broker also confirms that there is a loophole, and some lenders will only complete a CRAA check only if LVR exceeds 80%. If we can use these lenders, then no problems, I hope!

3) Are the guarantors required to disclose everything as well? I thought it would only be the actual applicant that is required to disclose everything. Criminal charges? Hmmm now that’s getting scary…

4) At this stage we will not be drawing a salary from the company, hence borrowing capacity will be determined by our full time jobs. I guess this loophole will be used to start things rolling- once things are in order, it is unnecessary perhaps?

The biggest reason for us to setup the structure is for increased borrowing capacity. We are not that worried about tax minimisation yet (although this is an added bonus), and asset protection is also not a concern at this stage. By the way, what is a “shelf company”? My mortgage broker suggested purchasing one to reduce costs. Thanx!


Cheers
Wei
 
Last edited by a moderator:
Reply: 1.1.1
From: See Change


Wei

Sorry to put a smart ass dampner on your plans , but if your financial education doesn't extend to knowing what a shelf company is .. then I suggest you proceed more slowly before you start borrowing large amounts of debt at a time when most people I know are not leveraging themselves any where near their maximum capacity in terms of LVR or Serviceability.

see change

it's better to be guided by your dreams than your fears
 
Last edited by a moderator:
Reply: 1.1.1.1
From: Paul Zagoridis


I agree with what See Change said Wei.

Also how can you know it is a loophole if you don't have a background in corporate structures and business?

Has someone told you it is a loophole? I suspect yes, but what is their agenda?

Have you experienced difficulties with your borrowing capacity? I suspect not.

On to your questions...

> 1) Regarding the loan application- isn’t
> the company the applicant rather than the
> director? I figured that since the
> director is only a guarantor,
> the “contingent liabilities” bit is not
> relevant- ie. the director has contingent
> liabilities, but the actual applicant
> (the company) does not.

Have you ever guaranteed a corporate loan? Some banks ask for everything, some don't. If they ask then you have a duty to disclose.

> 2) I was a bit concerned about having
> multiple enquiries on my personal file
> as well, but I guess a few enquiries
> should not matter. By the time I get
> enough enquiries to raise a few
> eyebrows, we should be able to move

It isn't the enquiries that are the problem. If you can show ability to service the loan it isn't normally a problem.

You are needlessly complicating things and incurring expensive structural problems by organising multiple corporate entities.

> into commercial lending at that stage,
> I believe. My mortgage broker also
> confirms that there is a loophole, and
> some lenders will only complete a CRAA
> check only if LVR exceeds 80%. If we
> can use these lenders, then no problems,

If these lenders are competitive then you don't need the multiple companies.

It would surprise me if a competitive loan was available with no CreditAdvantage check merely because you had a 20% deposit.

Even No-Docs loans require a credit check.

> 3) Are the guarantors required to disclose
> everything as well? I thought it would
> only be the actual applicant that is
> required to disclose everything. Criminal
> charges? Hmmm now that’s getting scary…

A guarantor can be called on to perform independently of the applicant. Also your lender knows they are lending you the money and you just happen to be structured using a corporation. I'm willing to bet they assess the early loans as if you were the applicant.

Criminal charges? When Enron, Worldcom, Global Crossings, K-Mart, HIH, and Ansett are in the news you can bet people are looking at corporate control. Your loophole is really just off-balance sheet financing without the $1000 per hour advisors.

> 4) At this stage we will not be drawing
> a salary from the company, hence
> borrowing capacity will be determined
> by our full time jobs. I guess this
> loophole will be used to start things
> rolling- once things are in order, it
> is unnecessary perhaps?

If your salaries are required this structure will cost you tremendously in cash and lost flexibility. Your first company will have no earnings history, so it will be you salaries underwriting the loan. Sooner or later you hit the funding wall and the company structure wont help.


> The biggest reason for us to setup
> the structure is for increased borrowing
> capacity. We are not that worried about

If your salaries are required to float the structure it will be a very shady lender who falls for it. Have you really looked at your borrowing capacity closely? Have you found more deals than you can handle?

> tax minimisation yet (although this is
> an added bonus), and asset protection
> is also not a concern at this stage. By

When will asset protection become a concern? Once it is too late/expensive to do something about it?

> the way, what is a “shelf company”? My
> mortgage broker suggested purchasing
> one to reduce costs. Thanx!

This says more about your broker than you. A shelf company is not cheaper. As a matter of fact they are more expensive (for me) than a made to order company.

Time to get a second opinion from another broker. You current broker wasn't recommended to you by the real estate agent was he?

Regards

PaulZag
Dreamspinner
WealthEsteem :: Psychology of the Deal
http://www.wealthesteem.org/
 
Last edited by a moderator:
Reply: 2
From: Rolf Latham


Hi Wei

No fly Im afraid. Guarantees are as good/bad as the loan itself therefore any lender will assess your service on your guaranteed amounts.

Not disclosing your guarantees will generally not help either since the CRAA file will show your guarantee.

Ta

Rolf
 
Last edited by a moderator:
W

WebBoard

Guest
Reply: 2.1
From: Wei Ng


Thanx for the input guys. Now I've gotta put on my thinking cap yet again...


Cheers
Wei
 
Last edited by a moderator:
Top