Have you ever wondered how to build business credit? Or how to best use a line of credit for your real estate investing business? While personal credit or cash have served many real estate investors well, they may limit your potential. That's where business credit comes in. By properly building and utilizing business credit, investors can achieve impressive results when scaling their business.
What is Business Credit?
Business credit is the financial history of a company used to determine creditworthiness. It ranges from 0 to 100, with scores above 80 considered good. Just like personal credit, business credit is calculated by organizations such as Bradstreet, Equifax, and Experian. It takes into account factors like loan payments, credit risk, and the likelihood of business closure.
Business credit is crucial because it opens up alternative financing options and protects personal credit from business-related expenses. From the moment you incorporate a business or apply for a loan, you begin building business credit. Regularly monitoring your finances is essential from the start.
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How to Check Business Credit
To check your business credit, request a report from organizations like Bradstreet, Equifax, or Experian. While there may be a cost involved, catching errors early is crucial. Aim to check your credit at least twice a year.
Investor Benefits of Building Business Credit
Building business credit for rental property investors offers several key benefits:
- Reduces personal risk involved in financing investments
- Establishes legitimacy within the industry
- Increases access to different financing options
- Allows for business growth
Risk
Separating personal and business finances protects against risks. Incorporating or forming a legal entity like an LLC decreases the risk of operating a business. It also offers wealth preservation and tax benefits.
Legitimacy
Building business credit establishes a positive reputation for your company. Competitors, lenders, clients, and other investors view established credit favorably. This not only makes doing business easier but also increases the value of your company.
Financing
Access to credit for real estate investors has improved over the years. With new regulations, lenders now offer financing primarily to businesses and for commercial purposes. Business lines of credit, commercial mortgage loans, and other financing options are available. These funds can be used to acquire, improve, and market income-producing properties.
Scalability
Building business credit opens doors for business growth and increased profits. With more financing options, you can pursue more complex real estate deals, build a passive income portfolio, or transition from residential to commercial real estate. Additionally, as your legitimacy grows, you may attract more investors or potential partners.
How to Start Building Business Credit
Getting started with business credit begins with incorporation or forming a business entity. Building a presence online and establishing professional credibility can also help. Follow these steps to start building your business credit:
- Incorporate your business: Choose the right legal structure for your business, such as an LLC, and register it with your state.
- Get a Federal Tax Identification Number: Obtain an EIN for your business to serve as the business ID number.
- Open a Business Bank Account: Research banks with good business account options and open a checking account in your business name.
- Get a Business Phone Number: Obtain a separate phone number for your business to manage communications and establish credibility.
- Start a Business Credit File: Check if your company is already on file with the main business credit bureaus. If not, start a business credit file.
- Get Business Credit Cards: Apply for business credit cards that report to the business credit bureaus. Shop around for the best option.
- Establish a Line of Credit with Suppliers: Develop relationships with at least five vendors to establish credit for your business.
- Pay Everything On Time: Consistently make all payments on time to maintain good business credit.
- Separate Your Expenses: Keep business and personal expenses separate to avoid confusion and financial management errors.
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How to Use Business Credit to Buy Real Estate
Business credit can be used to purchase real estate, primarily through a business line of credit or a credit card. A business line of credit allows you to take out credit from a bank or online lender for property purchases. The credit limit and interest rates vary based on your business's income and credit profile. Alternatively, you can use a credit card to buy real estate and earn rewards for business expenses. There are also certain loans available through the Small Business Administration (SBA), specifically for commercial real estate purchases.
Research thoroughly before using business credit to buy real estate and ensure it aligns with your goals.
How to Build Business Credit FAQs
Building business credit is essential for growing your real estate business, and understanding its nuances is crucial. Here are answers to frequently asked questions:
Which Entities Have Business Credit?
All business entities, including S corporations, C corporations, LLCs, and sole proprietors, can establish business credit. As an independent contractor or sole proprietor, registering as a legal business separates your business credit from personal credit.
Do Personal Credit Cards Build Business Credit?
Personal credit cards do not impact your business credit. Business and consumer credit bureaus are separate entities.
Which Small Business Loans Report to Business Credit?
Small business loan lenders have the option to report to business credit bureaus. While the Small Business Financial Exchange is not a credit reporting agency, it collects information that may be used by business credit bureaus.
Summary
Building business credit takes time, but it's a worthwhile endeavor for real estate investors. Pay attention to your credit from the start and follow the steps outlined in this guide. Business credit opens new financing opportunities and scales your business. Prepare yourself, and watch as business credit helps you grow and achieve your goals.
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