Real estate investors often don’t think of themselves this way, but in reality every real estate investor is a “business owner.” This is because each parcel of real estate you own has its own unique location, tenants, cash flow, maintenance costs, financing, and property taxes. And yet many investors continue to do business in their own name and use their own personal credit to acquire property. The good news is that there is a better way.
PERSONAL CREDIT v. COMMERCIAL CREDIT.
Real estate investors make the “deal” with the seller, but actually buy their properties with institutional lender financing or seller financing, or a combination of both. When an investor makes a decision, it is the property that must qualify, not the buyer. But when it comes to financing the deal, this is generally not the case.
In most cases, this is a personal guarantee. Lenders collect personal financial information before making a decision on your loan. They want information like your personal balance, income statement, and a personal credit profile to make a loan decision. The higher the debt-to-personal income ratio, the greater the pressure on your personal credit. Many investors step up and sign personal guarantees because they feel they have no other choice. However, if you use personal credit too often, it can hurt your personal credit score.
Your personal credit profile, whether you like it or not, is linked to your social security number and how you have managed your personal finances. The files maintained by consumer credit reporting agencies are separate and distinct from those maintained by commercial credit reporting agencies, but most people do not know the difference and do not understand the powerful impact that profiling can have. business credit, if it is. well done.
THE KEY IS TO BUILD A SEPARATE CREDIT PROFILE.
Regardless of what your personal credit score is today, it is possible to create a business credit score that is completely separate and distinct from your own personal credit. It takes planning and concentration, but it can be done. With a disciplined and systematic approach, you can work to build a positive business credit score that is not tied to your personal credit or spending habits, and you can do so in a timely manner by following a specific approach.
HE PASSED ONE: CREATE A COMPANY.
Establishing your ‘business entity’ is the first step. For most real estate investors, the chosen entity is a Limited Liability Company (“LLC”). Today, the national trend in company formation is that each year more LLCs are formed in the US than corporations. That wasn’t always the case, but today with the IRS’s adoption of its box-marking regulations, as well as asset protection and privacy now available in states like Nevada, limited liability companies have become very popular for its flexibility and privacy. , protection and simplicity of operation. (See our Special Report on LLC vs. ‘S’ Corporations.)
On top of that, over the past 10 years, the ‘LLC Series’ has emerged as the forefront in the evolution of LLC in America. Saves you repeat costs (up front) in legal training and (back-end) tax accounting. The series LLC essentially acts as a ‘mothership’ allowing the ‘cells’ or ‘series’ to distinguish each of the business enterprises (or properties) from the others, giving each the ability to have separate business activities, cash flow statements and accounting. but still having the ability to consolidate at the end of the year. That can save you thousands by not having to file separate business tax returns. The bottom line is that the more you don’t have to spend on lawsuits, taxes, and financing costs, the more you’ll have to reinvest to acquire more real estate.
HE PASSED TWO: HOW TO USE THE ‘BUILDING BLOCKS’ FOR SUCCESS.
The next step is to build credibility so that credit grantors and business credit reporting agencies understand why your business should enjoy a favorable business credit rating. Many people ‘assume’ that the commercial and consumer credit bureaus are the same, but they are not. Let’s take a look at the main business credit bureau before moving on to how exactly business credit should be established.
Dun & Bradstreet, Experian Business, Business Credit USA, Equifax Business, Client Checker, FD Insight together make up the vast majority of business credit reporting transactions in the United States today. The “big boy on the block”, of course, is Dun and Bradstreet, with roughly 70 million registered companies. The closest competitor is Experian Business, which has around 14 million registered companies. Each of the agencies has an army of employees who do nothing more than ‘verify’ certain elements of the business information, and if there are inconsistencies or questionable inputs, they generate ‘red flags’ regarding that business, which immediately results in a lower favorable credit rating.
There are some basic rules to understand. First, personal credit scores and business credit scores have two different scales on which they are measured. Personal credit scores (ranging from 300 to 850) are linked to your social security number as a personal identifier. Business credit is tied to the business entity’s taxpayer identification number (EIN) and ranges from 0 to 100. On the business side, a score of 75 or higher is considered excellent.
The most common mistake made by business owners seeking business credit is registering with business credit reporting agencies “too early.” That is, they sometimes do it before they have all of their ‘ducks lined up’ and verified by an independent third party. They believe that by simply registering with the major credit bureaus related to the business, they can start applying without being alerted. That is why it is so important to take specific measures before registering with business credit bureaus. So the key, of course, is to have all your ducks lined up before submitting a record to Dun & Bradstreet. The sequence must be followed meticulously so that all the steps expected and verified by the commercial credit bureaus have been previously trained and verified. Where personal credit could be ‘fixed’ if there have been problems in the past, there is no such equivalent in the world of business credit. That is why it is important to ‘get it right the first time’. After all, the goal is to acquire a solid business credit rating in the shortest amount of time, right? Looking at the big picture, the correct steps in the correct order are as follows:
o Formation of a corporation or better yet, a limited liability company
o Obtain an Employer Identification Number ‘EIN’. This is obtained through the Internal Revenue Service (“IRS”) and can be done online.
o Submit a DBA (‘do business as’) form if the company will be doing business under a name other than the legal or company name. Typically, the DBA is publicly filed in the county where the business will operate, and in some locations publication in a “newspaper of general circulation” is required.
o Business license. A business license is required to operate a business in almost all cities and most counties. A new business may also be required to obtain certain permits depending on the type of business.
o Registration of companies in the Tax Department. Typically, this is a step toward meeting local business tax or sales tax permitting requirements.
o Assessor’s Office. Depending on your location, the County Assessor’s office may need to issue an authorization for you to comply with local assessments due to the use of the property.
o Zoning ordinances. These may be applicable depending on the type of business. It is best to check with the City and not overlook this lest it appear later and create a red flag of compliance.
o Address and telephone number. Make sure the business address on all documents is the same between the state, county, city, and telephone company for your directory assistance list. The credit bureau will verify your directory assistance address and if it is the same as the address on your licenses, permits, and mailing address. If not, a “red flag” is created.
o Prepare a business financial statement and include it with a properly prepared business plan that would make sense if you were lending money to a third party.
HE PASSED THREE: BUILDING CREDIBILITY.
The final step in building business “business credit” is to establish a foundation for a favorable rating early on. Instead of using your individual personal name and social security number, once your business is registered, any credit report must be made using the name of the business entity and your Employer Identification Number (‘EIN’), which is the business equivalent of personal social security. number. “Business credit” is often underestimated. It is actually the largest source of financial loans in the world today due to the large amount used in real estate development, shipping, transportation, construction, etc. Many business owners are frustrated at the seemingly slow rate at which they can obtain business credit. Often the reason for the rhythm they get frustrated with is actually caused by them. That is, they “start” the wrong way, and these early mistakes in the basic setup often cause the business credit reporting agency to give off “red flags.”
Once these preliminary steps are completed, your business is ready to start working on business credit development, but not until then. When preparing for lines of credit, you want to start testing a payment history with companies that will report business credit on your business’s behalf. My advice is that it would be wise not to register your business with any of the business credit bureaus without first considering using a professional trainer familiar with this area.
To be honest, a certain amount of “hand hold” may be the fastest way to learn from mistakes that others (before you) have already made. That way, you won’t repeat them, and you won’t waste time brushing your scraped business knee to start over. This is where there is no substitute for experience and expertise. This is why working with an experienced business credit counselor might be the smartest way to go if you want to do it quickly and efficiently and achieve the kind of high business credit score you want if you are serious about building wealth. through your commercial real estate company.
I often get requests at workshops and conferences where I speak across the country for more information and referrals to quality vendors. If you’d like to get started, email me and I’ll show you how to get started down that path with reputable and ethical training to ‘get it right the first time’.