Clint Coons, Esq. explains the dos and don’ts of building credit for your real estate business.
Have you ever heard of credit companies that create business credit profiles for LLCs or corporations? If so, you’re going to want to steer clear. Here’s why.
At my workshops, I run into people all the time who tell me something like this: “Clint, I’ve signed up with this credit company that will help me create a business credit profile for my LLC or corporation. Then, I’ll be able to go out and buy real estate without needing to sign anything personally. Do you think it’s a good idea I paid them thousands to do this?”
In a word: no. I don’t think it’s a great idea. However much you paid them, it was too much.
I’ve had my business set up for 19 years, and I’ve seen a lot of success. Even with 19 years of credit history and profitability in my business, I’ve never been able to buy a piece of property without them pulling my individual credit profile or, if it’s a residential mortgage, signing personally.
Now, if you sign a non-recourse mortgage, yes — in those situations, you don’t have to sign personally, so it’s not an issue. It has nothing to do with your business credit profile. But that’s a separate discussion.
I’ve got news for you: the idea that you can create a credit history for a company and use it to go out and buy real estate without signing personally — it’s not going to happen. Don’t invest in building business credit for your LLC or corporation with the idea that you’ll be able to take down a property without having to personally sign or have it hit your credit profile. That only happens with non-recourse financing.
Even with non-recourse financing, they may not make you sign personally, but they’ll still run your credit to see if you’re creditworthy. Furthermore, to qualify for these types of loans, they ask for proof that you’re an experienced investor. I have these types of loans in my portfolio, so I know firsthand what kinds of questions they’ll ask: how many properties you own and how long you’ve been investing, to start. They want to know they’re not working with a rookie who’ll mismanage the property and jeopardize the loan.
When to Consider Building Business Credit
So, when should you actually consider building business credit? For trade lines — this is where building business credit could be beneficial.
If you have a company and want to generate trade lines where you don’t have to sign personally, then it makes a lot of sense to start looking at building up a credit profile for that business. If you have a corporation, building up credit lines with Home Depot, Lowe’s, paint companies, suppliers — this can be useful because it doesn’t require a personal guarantee, it goes right to your corporation, and they won’t look at your credit.
So, what does it take to build business credit? It doesn’t require a lot. If you’re like me and would rather have someone else do that for you so you can focus on your business — sure, do that. If you want to do it yourself, you’ll first need a DUNS number (data universal numbering system number, created by Dun & Bradstreet) associated with your business. Then, open some accounts in the name of your business; these will report back to that DUNS number and build your overall company credit profile.
One important thing to keep in mind if you’re utilizing this strategy: your business can’t be set up in a state that offers anonymity. You’ll have to be listed on the company, so don’t use Nevada, Wyoming, or Delaware. The reason for this is that, when those accounts are set up, they’ll look back to the Secretary of State website to verify that the person applying for the account is actually an officer in that company.
Once you’ve done this, you may have the ability to get larger lines of credit without having to sign personally. This is a beneficial strategy, but again — the concept of “I’ll buy real estate all over the country and never have to sign personally because they’ll just look at my company’s credit profile” — it’s not going to work. It’s never happened for me, or for my thousands of clients.
If you ever run into issues with your real estate business, or if you just have questions about the best choices for your individual situation, you can always reach out to one of my Senior Advisors to request a free consultation. You can schedule online or by calling 888.871.8535.