Corporate Credit

InvestorDirector.com

A guide to minimizing risk and exploding your real estate profits by obtaining business credit

Most real estate investors know that they have to form a corporation for their business’s legal protection. It is best to seek the advice of a real estate attorney, an expert real estate investor or a tax advisor so that the type of corporation you choose provides maximal legal and financial protection for your specific real estate investment activities. Whether you already own a corporation or not, this article was written to show you the importance of acquiring various lines of credit for business use, and what qualifications certain banks and credit unions have set forth for business owners who want to open up a business line of credit.

Besides being a legal fortress for real estate investors, a Limited Liability Corporation (LLC), or any other type of corporation for that matter, can also be used to establish something else for your real estate business:credit. Generally, if your LLC has an Employer Identification Number (EIN), its own bank account, and is able to show a profit over two or more consecutive years as evidenced by your corporation’s tax returns, you are considered to be a true business owner by most banks. At this point, you have a reasonable shot at obtaining some form of a line of business credit through a bank or credit union. Obtaining a credit line for a corporation is considered to be tremendously advantageous versus traditional mortgage financing for real estate acquisitions. When mortgages are used as a financing vehicle, your credit needs to be pulled and analyzed by potential lenders. This severely limits your investment activities because every time your credit is pulled by a lender and every time another mortgage goes on your credit report, your credit scores fall. This is tedious, time consuming and costs you money. The lower your scores, the higher the interest rates you pay. Also, mortgages are required by lenders to be held personally; mortgages cannot be held in your LLC’s name. This means if you default on any mortgage you carry, your credit will get hurt badly and kill your ability to acquire more homes individually for a minimum of three years. Even if you quit claim a home, which was bought with a mortgage, to your LLC for liability purposes, you are still personally responsible for making the mortgage payments.

Personally guaranteed business lines of credit

Initially, your bank or credit union will require a personal guarantee on your credit line(s). This is not considered true business credit as this type of credit still functions the same way as personal credit. The advantages are still well defined though. With a business credit line that is personally guaranteed, your credit report will have less activity on it because only the credit line will appear on your credit report; no more multiple credit pulls and mortgages to whack your credit scores every time you acquire a property. Personally guaranteed business lines of credit allow you to buy property in your corporate name which is safer to do from a liability standpoint. No more quit claiming property out of your personal name and into your corporation as you have to do when you use mortgages for acquiring deals. Additionally, credit lines give you buying power –the ability to buy multiple homes at once. This allows you to acquire property with much less effort. When banks, real estate agents, and other property sellers know you play with cash (in the form of large credit lines), you’ll have the opportunity to acquire great deals expediently.

I’ve had the opportunity to interview and partner with several investors that have millions of dollars in personally guaranteed credit lines. For them, just as it will be for you, their lines of credit all started with 2 year’s profits on their real estate LLC’s tax returns. These elite real estate investors are able to purchase 5 to 50 homes at a time, right from bank asset managers and real estate agents who list foreclosed homes (commonly called REO Agents) for as little as ten cents on the dollar. They can close these deals in as little as 72 hours. What’s more is that they can carry the costs of these homes (taxes, upkeep and insurance) and sell them either wholesale (no rehab) to other investors, or sell them rehabbed to owner occupant buyers whenever they want. They can profit on dozens of homes in the same time it takes an investor who uses mortgage financing to turn over one home. That’s the power of using a business credit line versus acquiring homes using mortgage money.

Unsecured business lines of credit

Generally in the beginning, you are personally liable for your business credit line(s) as they will probably be tied to your personal credit profile. Over time, you can build your LLC’s business credit and actually separate your personal credit file from your business credit lines. Developing a business credit profile and acquiring unsecured business credit lines allows you the benefit of purchasing homes in your corporate name with no liability on your personal credit report. In other words, if you make some serious mistakes, get sued, or some unforeseen financial catastrophe happens and you are forced to walk away from your real estate holdings that were purchased using your unsecured business credit line(s), you can simply walk away or work things out with your bank and not be personally impacted from a financial or a credit standpoint. Building business credit takes time and is highly revered by elite investors. If you can make it to this level, you’re a proven investor.

The process of separating your company’s credit profile from your personal credit profile begins the same way as in the process of acquiring a secured business line of credit. To recap, those steps are to incorporate or form a LLC based on the advice of your attorney or tax advisor. Please see the article entitled Names Will Never Hurt You…or Will They? Published in the June 2010 issue of InvestorDirector.com Magazine, this article centers around the importance of choosing a corporate name for your company. This is a very crucial issue and can set your quest for obtaining corporate credit back a full two years if you don’t name your company correctly. Once you have a corporate entity named and registered, you will need to obtain a federal Employer Identification Number (EIN). Then, you will need to open a separate business bank account for your company. The steps for obtaining unsecured credit are now listed below:

1. Obtain a D-U-N-S Number. This is a 9-digit number issued by Dun & Bradstreet (a business credit reporting agency) that most companies utilize to verify the credit history of businesses.

2. Compliance. Make sure you’ve obtained all necessary business licenses, permits, etc. that are required in your jurisdiction for your selected vocation.

3. Business Phone Line and Yellow Pages Listing. Make sure your business is listed in the phone directory and the phone line is in the business name, not in your personal name.

4. Same Business Address. Make sure the exact same business address is used for your DUNS number, the yellow pages listing and phone number as well as on business licenses and company credit cards (that you will be applying for later). Your home address is acceptable, however, private mailboxes and P.O. boxes may not be.

5. Apply to “New Business-friendly” Creditors. Start applying to companies that generally grant new businesses credit cards and lines of credit without requiring a personal guarantee. These companies will then update your credit profile with the various credit agencies. Some of these companies would include Office Max, Staples, Home Depot, Lowe’s, Sunoco (or other gas stations) etc. Another way to begin to establish a business credit profile would be to open up a secured line of credit with a bank, credit union or a trade vendor like the companies named above. Three business credit cards and five corporate vendors/suppliers that report to the credit bureaus will optimize your corporate credit rating.

There are several websites that offer free advice regarding building a corporate credit rating, which ultimately leads to the acquisition of unsecured business credit. Some of the resources containing excellent information are listed below.

• http://www.businessfinancecoach.com/
• www.businesscreditcoaches.com
• http://www.corporatecreditpower.com/index.htm
• www.corporatecreditsuccess.com

Some companies charge a fee, usually in the thousands, to counsel or coach you through the process of developing unsecured corporate credit. In fact, these companies are easy to find on the Internet by simply searching using the words “corporate credit”. Many of these companies offer a guarantee and personal counselors to work with you for what takes most corporations five or more years to develop. These firms claim they can get unsecured business lines of credit it in as little as three years, streamlining the process by exploiting loopholes in the underwriting process of obtaining corporate credit. Many offer aged “shelf” corporations, which are dormant companies that already have existing credit lines attached to them. Though this sounds excellent, nothing suffices for a sound company that obtains credit on principles of integrity and communication between it’s officers and sponsoring lending institutions.