Real estate investors often don’t see 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 purchase property. The good news is that there is a better way.

PERSONAL CREDIT v. BUSINESS CREDIT.

Real estate investors make ‘the deal’ with the seller, but they actually buy their properties with financing from the institutional lender or financing from the seller, or some combination of both. When an investor makes a decision, it is the property that he has to rate, not the buyer. But when it comes to financing the deal, that’s usually not the case.

In most cases, it 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 your personal debt-to-income ratio, the greater the pressure on your personal credit. Many investors go ahead and sign personal guarantees because they feel they have no other choice. However, if you use personal credit too often, it can actually hurt your personal credit score.

Your personal credit profile, whether you like it or not, is tied to your social security number and the way you’ve managed your personal finances. The files maintained by consumer credit reporting agencies are separate and different from those maintained by a commercial credit reporting agency, but most people don’t know the difference and don’t understand the powerful impact developing a credit report can have. business credit profile, if done right.

THE KEY IS TO BUILD A SEPARATE CREDIT PROFILE.

No matter 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 focus, but it can be done. With a disciplined, systematic approach, you can work to build a positive business credit score that isn’t tied to your personal credit or spending habits—and you can do it in a timely manner by following a specific approach.

HE PASSED ONE: CREATE A BUSINESS.

Establishing your ‘business entity’ is the first step. For most real estate investors, the entity of choice is a Limited Liability Company (“LLC”). Today, the national trend in company formation is that more LLCs are formed in the US each year than corporations. That wasn’t always the case, but today with the IRS’s adoption of its check-box regulations, as well as asset and privacy protection now available in states like Nevada, limited liability companies have become very popular for its flexibility, privacy, protection and simplicity of operation. (See our Special Report on Limited Liability Companies vs. ‘S’ Corporations.)

On top of that, in the last 10 years, the ‘Series LLC’ has become the vanguard in the evolution of LLCs in the United States. Saves you repeat costs (up front) on legal training and (on the back-end) tax accounting. The Series LLC essentially acts as a ‘mother ship’ allowing the ‘cells’ or ‘series’ to distinguish each business enterprise (or property) from the others, giving each the ability to have separate business activities, status cash flow 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 in judgments, taxes and financing costs, the more you will have to reinvest in acquiring more real estate.

HE PASSED TWO: HOW TO USE ‘BUILDING BLOCKS’ FOR SUCCESS.

The next step is to build credibility so that credit grantors, as well as business credit reporting agencies, understand why your business should enjoy a favorable business credit score. Many people ‘assume’ that commercial and consumer credit bureaus are the same, but they are not. Let’s take a look at the major business credit bureaus 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 kid on the block’ of course is Dun and Bradstreet, with approximately 70 million registered businesses. 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 items of business information, and if there are inconsistencies or questionable entries, this raises ‘red flags’ as to 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 tax identification number (EIN) and ranges from 0 to 100. For business, a score of 75 or higher is considered excellent.

The most frequent mistake of all that business owners make when seeking business credit is registering with the business credit bureaus ‘too early’. Meaning, sometimes they do it before they have all their “ducks lined up” and verified by an independent third party. They believe that by simply registering with the major business-related credit bureaus, they can start applying without being raised a red flag. That is why it is so important to take specific action steps before registering with the business credit bureaus. So the key, of course, is to have all the ducks in a row before submitting a record to Dun & Bradstreet. The sequence must be meticulously followed so that each step expected and verified by the business credit bureaus has been previously advised and previously verified. Where personal credit can be ‘repaired’ if there have been problems in the past, there is no such equivalent in the world of business credit. That’s why it’s important to ‘get it right the first time’. After all, the goal is to acquire a strong business credit score in the shortest possible time, right? Looking at the big picture, the proper steps in the correct order are as follows:

o Formation of a Corporation or better yet, a Limited Liability Company

o Get an Employer Identification Number ‘EIN’. This is obtained through the Internal Revenue Service (“IRS”) and can be done online.

o File a DBA (‘doing business as’) form if the business will be doing business under a name that is different from the legal or business name. The DBA is normally filed publicly in the county where the business will operate, and in some localities publication in a ‘newspaper of general circulation’ is required.

or 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 Business Registration in the Tax Department. Typically, this is a step to comply with local business tax or sales tax permit requirements.

o Office of the Assessor. Depending on your location, the County Assessor’s office may be required 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’s best to check with the City and not overlook this lest it show up later and create a red flag of compliance.

o Address and telephone number. Make sure the business address on all documents is the same among the state, county, city, and telephone company for your directory assistance listing. The credit bureau will verify your directory assistance address and whether it is the same as the one shown on your licenses, permits, and mailing address. If not, that creates a ‘red flag’.

o Prepare a business financial statement and include it with a properly prepared business plan that makes sense if you were lending money to someone else.

HE PASSED THREE: BUILDING CREDIBILITY.

The final step in creating a 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 reports 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 that is used in real estate development, shipping, freight, construction, etc. Many business owners are frustrated by the seemingly slow pace at which they can obtain business credit. Often the reason they get frustrated is actually caused by them. That is, they ‘start’ the wrong way, and these early errors in the basic setup often cause the commercial credit reporting agency to issue ‘red flags’.

After completing these preliminary steps, your business will be ready to begin 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 in your business name. My advice is that you 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-holding’ may be the quickest way to learn from mistakes 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 knowledge. That’s why working with an experienced business credit coach might be the smartest way to go if you want to get it done quickly and efficiently and achieve the kind of high business credit score you’ll want if you really want to build wealth through your business. commercial real estate

I often get requests at workshops and conferences where I speak across the country for more information and referrals to quality providers. If you’d like to get started, email me and I’ll show you how to get started down that road with reputable and ethical “do it right the first time” training.