Capital Contribution Recommendations for Corporate Loan

For a foreign corporation seeking to create a subsidiary in the United States, the process is relatively simple. In fact, there is no minimum capital contribution required, which means a corporation can be formed with just $1 of initial capital. However, while there might not be a minimum contribution to create a US subsidiary, it may be worth contributing a larger amount in order to secure any future loans for the corporation.

Lenders want to make sure that the loans they lend will be repaid, and they will look at a number of factors to determine whether or not to approve a loan. These factors range from credit rating, industry risk, and debt-service coverage ratio (DSCR). The DSCR measures a corporation’s available cash flow to pay its current debt obligations. If a corporation has a DSCR of 1.0, that means the corporation has exactly enough operating income to pay off its debt. Therefore, lenders will usually set a minimum DSCR requirement of 1.2-1.5. By increasing its initial capital contribution, a corporation can show lenders that it has adequate cash to pay off any debts accrued.

Finally, a good rule of thumb for corporations is to have enough capital to cover its costs for six to eighteen months. However, every corporation is different, and each corporation should base its decisions on its personal business needs and goals.

By contributing greater than the minimum amount of initial capitalization, corporations put themselves in a better light for lenders and increase the likelihood that they will be able to receive corporate loans.

BridgehouseLaw is happy to help you navigate company formation.