For more information regarding the establishment of business credit, please reference part one of our Building Credit For Your Real Estate Business series.
The Value Of Good Business Credit
Both business credit and personal credit are absolutely pivotal in growing a sustainable company. However, it is always in the best interest of respective investors to supplement their personal credit with business credit. After all, regardless of whether or not private investors are involved, everyone needs access to capital. Perhaps even more important than the credit itself, are the opportunities it creates. With viable business credit, investors of every level are given access to deals that may have otherwise been unavailable. Essentially, the sooner you are able to comprehend the benefits business credit has to offer, the sooner you will be able to accelerate the process in which you build wealth and partake in profitable exit strategies.
The concept of business credit is only strengthened by the fact that it can support the entire foundation of your company.
Building business credit is a lot like building a house. The foundation of each is not only the most important, but also the basis on which the rest may be developed. Conversely, a poor foundation for each will jeopardize any potential for future success. A house with a poor foundation is at risk of falling apart, whereas poor business credit can prevent you from even gaining access to capital. Ultimately, it is important to have a safe and reliable line of business credit.
In the beginning, it can prove difficult to receive a line of credit in your business name. As you acquire more lines of credit, however, the process shows signs of easement. Once again, the foundation plays and instrumental role. With a solid foundation in place, investors are more likely to secure large amounts of funding when they need it. This alone will give investors an advantage over anyone who is lacking in the business credit department. However, the benefits do not stop there.
The Benefits Of Good Business Credit
- Increase Loan Approval
- Better Approval Terms
- Lower Interest Rates
- Steady Cash Resource
- Separates Personal Assets
- Protects Personal Credit
- Capital For Expansion
- Rainy Day Fund
- Large Credit Capacity
- Increase Company Value
As mentioned earlier, an established business credit profile can provide investors with peace of mind. In particular, good business credit can protect each of your individual assets. Unless personal and business income is kept separate, personal assets including cars, home, and savings can be at risk from malicious and frivolous lawsuits. As a business owner, you should be able to limit, if not eliminate, the use of personal credit checks. This will prevent you from having to marry personal credit, personal debts, and personal assets with your company.
Keep in mind that if you are the sole proprietor of a business with fewer than 20 employees, your personal and business credit scores are closely linked in the eyes of banks and similar lending institutions. Having said that, it is important to protect both. Make sure you take the appropriate steps to monitor, evaluate, and protect your credit standing. The worst thing you can do is to neglect it.
4 Steps To Establish Business Credit
Step One: Compliance
Compliance, as it is with any industry, is particularly important when it comes to building business credit. It is absolutely critical that you meet any requirements asked of your business. Failure to comply raises several red flags with both credit bureaus and grantors. In order to establish a business credit profile that can help your business succeed, you must address the following:
- Business Location: In order to build business credit, you must have a physical address for your company. A P.O. Box, virtual office, or mail service facility do not count.
- Business Phone: You business must have a separate phone number from that of your personal one. It must also be listed with directory assistance.
- Entity Record Book: If you have filed your business in a state other than your home state; you must foreign file in your operating state. Additionally, you will need to obtain a Certificate of Good Standing from the sate of incorporation for your entity.
Step Two: Registration
Credit bureaus will automatically be able to track your business once it is registered. However, business credit is tracked differently than that of personal credit. When registering your business, you will be required to have a business name, physical address, and either your Federal Tax Identification Number (FIN) or Employer Identification Number (EIN).
Contact the Internal Revenue Service (IRS) to obtain either your FIN or EIN once you have formed a corporate identity. That is to say, once you form a corporation or an LLC, you will be eligible to obtain each. To do so, log on to the IRS website and apply. Your EIN will serve as identification for your business for tax purposes.
Step Three: Acquisition
Assuming you have come this far, the next step in establishing good business credit is to begin accumulating credit. This can be accomplished through any of the four tiers of financing that have made themselves available to small business owners. Familiarize yourself with the following tiers and develop a strategy to take advantage of each:
Tier One Vendors
Vendors associated with this tier will more than likely extend credit to any business that asks for it. It doesn’t matter whether or not the requesting business is new, does not have any prior credit history, or does not personally guarantee their purchases. Credit accounts that fall under this tier are usually Net 30, a reference to the 30 days companies have to pay off purchases. While interest won’t be charged, borrowers will incur a fee for late payments. Moreover, there is no grace period when enlisting the services of business credit accounts in this tier, making it that much more of a priority to pay each invoice in full, on time. Examples of tier one vendors include: FedEx, HD Supply and Seton.
Tier Two Vendors
Unlike their tier one counterparts, tier two vendors require businesses to meet specific credit criteria. More specifically, you can apply for tier two vendors once you receive your D&B report with a Paydex score of at least 80. This will allow you to continue with the credit building process. Examples of tier two vendors include: Home Depot, Office Depot and Staples.
Tier Three Vendors
Tier three vendors fall into the category of business financing and bank lending. They are simultaneously more recognizable and harder to receive lines of credit from. Like tier two, you must have a Paydex score of at least 80, but you also need 5-6 trades reporting on your D&B profile. There are two types of vendors in this category: Net 30 and revolving. Examples of tier three vendors include: Sears, Best Buy and New Egg.
Tier Four Vendors
Tier four represents the pinnacle of vendor credit. As such, vendors at this level have the strictest requirements. A minimum of 7-9 trades reporting on your D&B profile are required before you can even consider the assistance of tier four vendors. This tier is where you will typically find private investors, venture capitalists and other types of investors. As you may have already guessed, this tier is typically reserved for larger, established businesses.
Step Four: Development
In the event that you are granted credit from any level of vendors, it is absolutely imperative that you stay on top of your payments. However, it is equally important to make sure respective vendors report prompt payments to credit bureaus, as it will place your business in good standings. Subsequently, vendor reports are one of the best and most important ways a business can develop good credit. Essentially, developing business credit is very similar to that of personal credit. Be sure to pay on time, in full and you will benefit from a good report.
When To Use Business Credit
Business credit, as I am sure you are aware of by now, is an integral addition to any real estate investor’s arsenal of tools. It has the ability to facilitate a smooth transaction. Perhaps even more importantly, it can make even difficult acquisitions more pleasant for every party involved. However, there are three primary ways in which business credit should be used. They are as follows:
Using a hard moneylender or private funding for your deals is a staple in the real estate investment world. This finance option is key when a mortgage loan becomes impractical, or even impossible to obtain. With good business credit, you can typically get your hands on funding fairly quickly, which would allow you to jump on a good deal before anyone else has the chance to.
Covering Unexpected Costs
Investing in real estate is about as unpredictable as businesses come. Having said that, it is almost impossible to determine from which direction additional costs may be incurred. You may need to tap into reserves to relocate your office building or to simply provide maintenance on any buy-and-hold properties in your portfolio. Essentially, costs will arise, and you need a way of dealing with those that are unexpected. Business credit is your answer. Good business credit is the key to staying on your feet.
Filling In The Gaps
Real estate investors will inevitably be subjected to both highs and lows. However, relatively new investors may not be familiar with the lump-sum payment method that is associated with this line of work. As investors, a typical payday consists of one large payment. While this is great, it may be the only payment you receive for some time. Therefore, there needs to be an intermediate plan in between paydays. You will need supplemental streams of cash reserves. Fortunately, business credit can fill in the gaps between paydays. It provides more flexibility than additional liens and loans, and it leaves equity in case the market turns.