Investor · Pittsburg, CA · Member since 2018 · 11 posts · 23 votes
Hi everyone,
I see a lot of posts about people wanting to build business credit and how to build business credit, but I'm not sure I understand why you need business credit.
I just started investing and am planning to structure my business as a sole proprietorship. I have no plans to incorporate until I've reached a certain scale. Right now, it makes more sense for me to purchase homes in my own personal name in order to take advantage of my personal credit.
This brings me back to my question. Why is it important to build business credit early on and what purpose does it serve later? Second, if I decide to build business credit now as a sole proprietorship, how can I transfer that established credit to an entity when I decide to incorporate later?
Hello Kevin, good for you for starting the journey!
The key to understanding business credit, is understanding the importance of separating personal and business finances. Why should you separate business from personal finances?
Reason 1) liability protection. If you operate a business and someone sues your business, will they be able to get to your personal finances, including your home? If you commingle personal and business, the answer is yes.
Reason 2) taxes. A business entity can deduct business expenses, while a sole prop that commingles assets, cannot.
Reason 3) finances. If you are purchasing investment property that you will not live in, lenders prefer to lend to an entity like an LLC or a trust. The lenders that I work with in this space WILL NOT lend to an individual.
Reason 4) credit. Length of credit file is one of the key elements of a credit report. The sooner you begin building business credit, the better and more robust it will be.
Reason 5) credit. Building your business credit allows you greater flexibility. Imagine doing a fix and flip and not having to borrow to cover the cost of repairs, but instead being able to finance that with your business credit. Imagine being able to handle cost over runs without having a last minute, desperate call to an investor.
Reason 6) credit. All too often, investors end up wrecking their personal credit in the process of doing a project. This makes makes you unattractive to lenders. Imagine having business credit in place that can handle the sudden cash needs of your business. This protects your personal finances and it also protects your business, as well.
Reason 7) Run your business like a business, not a hobby.
These are just a few thoughts for you Kevin, I hope it adds perspective.