BiggerPockets

Getting a loan for an LLC and building corporate credit

41 posts by 33 users

Sam Green

Real Estate Investor from Delaware

Feb 18 '05, 01:09 AM


If I were to open up an LLC for the purpose of buying property, how would I get a loan? Are there lenders that deal exclusively with LLCs?


Edited Jun 26 2010, 02:49


N/A N/A

Feb 18 '05, 01:44 AM
1 vote


Originally posted by "SamGreen":
If I were to open up an LLC for the purpose of buying property, how would I get a loan? Are there lenders that deal exclusively with LLCs?

You're going to have to find what's called a commercial lender. Standard lenders will not work with you most likely. In addition, you're going to have to guarantee the loan personally. As your company builds up its own credit rating (show steady income I think), it will become possible to get a loan through the LLC without your guarantee. :mrgreen:


Edited Jun 26 2010, 02:49


N/A N/A

Feb 19 '05, 07:36 PM
5 votes


reprinted with permission from John michael

Whenever possible, try to establish credit lines that will grow along with the business. For example, in setting up a credit line with your bank, try to get a credit line based on a percentage of your receivables, rather than a constant, static amounts. Chances are your credit line will be reviewed by your bank annually and will be subject to ceilings and restrictions, but try to build as much flexibility into your borrowing relationships as you can. This will leave you better equipped to finance fast growth. Also try to establish credit lines with your trade suppliers that grow along with your business as well.

Establishing the business's credit should be started before the company needs it. No lending institution wants to lend money to a business in need of cash flow. The business can start out using the owner's or officer's credit to gain approvals under the business name, but as the business grows it should start to establish it's own credit history and credit profile in order to take on business credit of it's own. This is possible with a Corporation or Limited Liability Company (LLC) using the corporation tax identification number

When officers and owners use their own personal credit profiles to obtain credit for the business, they risk the chance of lowering their own personal credit scores. There are two reasons business owners should try not to use their personal guarantee on business credit. First, the individual signer is liable if the business cannot make the payments and second the credit obtained for the business can affect the person's personal credit score.

Keep in mind, your personal credit score is based on several factors, including available credit, the amounts of available credit used, late payments, and much more.

Obtaining credit for a business is a process that should be established over time. The older the business the more options the business will have to build credit and obtain loans and leases without the use of personal guarantees. It is not easy to do this, but yet it is not impossible. The first step is to start building the business credit today.

A credit score is built by having lines of credit, credit accounts and trade references that report to the business credit bureaus. For most businesses it's very difficult to find a business willing to grant credit with no personal guarantee and without any previous credit history. If you have your own trade references, you should work with them to build the score. However most businesses need additional trade references that will grant credit and report to the credit agencies.

Some helpful business sites on building business credit:

* Wells Fargo Small Business - Loans and Lines - Comparison Chart
* Report on the Role and Function of Credit Rating Agencies
* FTC FACTS
* D&B Small Business Solutions

Some of my students have use this site with some luck (I know nothing about the service)

Business cash advance - http://www.amerimerchantcapital.com

Some other help tools

* National Business Association http://www.nationalbusiness.org
* Small Business Information Center/Research http://sbdcnet.utsa.edu/SBIC/industry.htm
* Urban Redevelopment Authority http://www.ura.gov.sg/
* Black Enterprise Online http://www.blackenterprise.com
* National Black Business Trade Association http://www.nbbta.org/
* National Black Chamber of Commerce Inc. http://www.nationalbcc.org
* Small Business Information Center/Franchise http://sbdcnet.utsa.edu/SBIC/franchise.htm
* Unites States Hispanic Chamber of Commerce http://www.ushcc.com
* KeyBank's Website Women Focus Section http://www.key.com/women
* National Education Center for Women in Busines http://www.e-magnify.com


Edited Jun 26 2010, 02:49


N/A N/A

Feb 22 '05, 05:41 AM


Wow - well this is more great info to help me out! Thank you everyone. Its funny how there are so many things that the books just don't tell you. This community has been really useful so far for me.

As for LLCs, it seems like you have to cover yourself for a while, but once you've got a mini "empire" going, then you should be able to use your LLC to make everything happen. Cool.


Edited Jun 26 2010, 02:49


Sam Green

Real Estate Investor from Delaware

Feb 28 '05, 02:53 AM


Thanks CashInvestor and reiaddicted. I haven't been able to find this information anywhere else. Seems like a much more feasable idea now.


Edited Jun 26 2010, 02:49


Darryl K

Real Estate Investor from Rochester, New York

Mar 07 '05, 04:52 AM


Great info guys. I was never really very sure about how to get a loan if I had an LLC. I've got it figured out now thanks to you! Fantastic! :mrgreen:


Edited Jun 26 2010, 02:49


N/A N/A

Mar 17 '05, 02:00 AM


Excellent information, thanks!


Edited Jun 26 2010, 02:49


N/A N/A

Mar 17 '05, 11:09 PM


Originally posted by "reiaddicted":
reprinted with permission from John michael

Whenever possible, try to establish credit lines that will grow along with the business. For example, in setting up a credit line with your bank, try to get a credit line based on a percentage of your receivables, rather than a constant, static amounts. Chances are your credit line will be reviewed by your bank annually and will be subject to ceilings and restrictions, but try to build as much flexibility into your borrowing relationships as you can. This will leave you better equipped to finance fast growth. Also try to establish credit lines with your trade suppliers that grow along with your business as well.

Establishing the business's credit should be started before the company needs it. No lending institution wants to lend money to a business in need of cash flow. The business can start out using the owner's or officer's credit to gain approvals under the business name, but as the business grows it should start to establish it's own credit history and credit profile in order to take on business credit of it's own. This is possible with a Corporation or Limited Liability Company (LLC) using the corporation tax identification number

When officers and owners use their own personal credit profiles to obtain credit for the business, they risk the chance of lowering their own personal credit scores. There are two reasons business owners should try not to use their personal guarantee on business credit. First, the individual signer is liable if the business cannot make the payments and second the credit obtained for the business can affect the person's personal credit score.

Keep in mind, your personal credit score is based on several factors, including available credit, the amounts of available credit used, late payments, and much more.

Obtaining credit for a business is a process that should be established over time. The older the business the more options the business will have to build credit and obtain loans and leases without the use of personal guarantees. It is not easy to do this, but yet it is not impossible. The first step is to start building the business credit today.

A credit score is built by having lines of credit, credit accounts and trade references that report to the business credit bureaus. For most businesses it's very difficult to find a business willing to grant credit with no personal guarantee and without any previous credit history. If you have your own trade references, you should work with them to build the score. However most businesses need additional trade references that will grant credit and report to the credit agencies.

Some helpful business sites on building business credit:

* Wells Fargo Small Business - Loans and Lines - Comparison Chart
* Report on the Role and Function of Credit Rating Agencies
* FTC FACTS
* D&B Small Business Solutions

Some of my students have use this site with some luck (I know nothing about the service)

Business cash advance - http://www.amerimerchantcapital.com

Some other help tools

* National Business Association http://www.nationalbusiness.org
* Small Business Information Center/Research http://sbdcnet.utsa.edu/SBIC/industry.htm
* Urban Redevelopment Authority http://www.ura.gov.sg/
* Black Enterprise Online http://www.blackenterprise.com
* National Black Business Trade Association http://www.nbbta.org/
* National Black Chamber of Commerce Inc. http://www.nationalbcc.org
* Small Business Information Center/Franchise http://sbdcnet.utsa.edu/SBIC/franchise.htm
* Unites States Hispanic Chamber of Commerce http://www.ushcc.com
* KeyBank's Website Women Focus Section http://www.key.com/women
* National Education Center for Women in Busines http://www.e-magnify.com

http://jmichaelrei.com/

reiaddicted
Thanks this is very valuable information!!!!


Edited Jun 26 2010, 02:49


N/A N/A

Mar 28 '05, 04:45 AM


Great info as usual all. Thanks Cash!


Edited Jun 26 2010, 02:49


Brandon Ellis

from Dayton, OH

Apr 23 '07, 12:57 PM


A few of the links are dead, but I thought this old post would be good for some of us new members to look at.

I haven't purchased a single investment property yet, and I am wondering if it would be wise for me to form an LLC. now as opposed to later?

Suppose I form the LLC. and complete only one deal before the end of the year. Then use it's credit line to purchase a day planner, property management or finance software, Business Cards, etc. thus building a small amount of credit for the business.

I know most investors don't take this step until later (if ever), but after looking at SDRE's post, I wonder if the benefits outweigh the cost involved in starting early.

Brandon


Edited Jun 26 2010, 03:31


Jeff Takle

Real Estate Consultant from Somerville, Massachusetts

Apr 23 '07, 08:31 PM
1 vote


[Another typically long post from me...]

It definitely takes time to build credit so starting early will pay dividends later. Even if you " build credit" a bank will not loan an LLC money if the LLC cannot show either substantial assets or a steady, reliable income stream. So, either the newly acquired property will have to more than pay for itself (e.g., a good cash flowing rental with a signed lease prior to closing) or it will have to have a steady source of other income (e.g. from consulting, property management, or RE sales over time, etc.).

Another option if you've been doing REI for a while is to roll a paid-for property into the LLC, thereby giving the LLC some assets which it can borrow against. For example if you own a condo outright, sell it to the LLC for a nominal charge and then use that LLC-owned property as collateral against investment loans.

I don't think getting a loan with an LLC is all that difficult; your choices are somewhat fewer but it's doable if the LLC either has assets and credit history of its own, or you give a personal guarantee.

And, since I haven't heard anyone specifically mention it, expect to pay several points and a higher interest rate if you are borrowing for the LLC--banks take higher risks by lending to a company versus a person living in home and those risks reflect in the higher rates. This will impact your ability to cash flow, etc. In many cases, people get excited about the idea of starting an LLC without understanding it will cost you more to do business in exchange for what can be very limited liability protection.

Finally, on the personal guarantee. Is it an awesome thing to do? No. But, sometimes we can't sit back and wait for the perfect situation to present itself. Do the best you can with what you have; if that means taking out an LLC loan with personal guarantee, and using an LLC to do the investments for you is the right business move for you, then go for it.


Edited Jun 26 2010, 03:31


Brandon Ellis

from Dayton, OH

Apr 24 '07, 06:57 PM


takelberry,

Good advise. thanks. I am still early in the planning stages, planning is everything right now. Any more insight on LLC's anyone? Are there better options than an LLC. ?

Brandon


Edited Jun 26 2010, 03:31


Jorge Espinoza

Apr 25 '07, 07:28 AM


I personally dont know much about an LLC but after reading this great message from all you guys wants to make me set one up for myself.How long is the process and for us Real Estate Investors should we just get the basic one if there is one because i thought i read an article on the web about 3 different kind which is the basic,standard and more advance i could be wrong im also going to start calling some companies that help you set up an LLC and try to get as much information as possible about advantages and Disadvantages and State fees for the State of California.Also is it recommended to get an LLC in a different state like lets say Nevada or Arizona because of tax advantages...HAPPY INVESTING.. :idea: :idea: :idea: :idea:

Regards,
Jorge Espinoza

" Natural Born Go Getter" :superman:


Edited Jun 26 2010, 03:32


Jeff Takle

Real Estate Consultant from Somerville, Massachusetts

Apr 25 '07, 10:46 PM


Setting up an LLC is incredibly easy. You don't need a company to do that for you. IMHO that's wasting money. Nolo has a series of books that are completely adequate to show you the pieces that need to be in place. Go to your library and get the Nolo book or have them borrow or order it for $40 on your own. Should take 30 minutes to skim through and you're all set.

Every state has different fees, etc. You can set up an LLC in any state, but you'll need a designated agent in whatever state you set up in case you're ever sued--they want a physical address to deliver notices to, taxes, etc. Again, the easiest solution is to ask a friend/family who live in the state you're starting the LLC (if it isn't your home state) to act as your agent. They'll probably never get any paperwork from the state.

There aren't three different kinds of LLCs as you mentioned; not that I know of. Just single-member LLCs and partnership LLCs. Some states don't allow single member LLCs and most have restrictions on the maximum number of partners. You will want to decide if you'll have partners or not. A single-member LLC (just you alone) is really easy to file tax-wise. It's just a Schedule C which any TurboTax program can do for you. If you have 2 or more members, then you'll have to file a partnership returns and generate K-1s for each member. TurboTax doesn't do those well and you'll probably end up getting an accountant ($$$) to file that for you. More paperwork.

If it's just for investing, my advice is to keep it as a single-member LLC, file with your state (takes 10 minutes) to set up the LLC, pay the fees, get an Employee Identification Number (EIN) from the IRS website, set up a solo-401(k) through your new LLC to tax-defer income into your retirement accounts, and you're off and running.

Your taxes can vary widely so it pays to look at each state's annual fees, as well as your county taxes for business license, gross sales receipts tax, etc. Nolo has a nice index in the back of the book to help you compare all states. You'll have to research counties yourself.

[b]Starting an LLC is very easy. Running it correctly, paying all the right taxes at the right times, and making it function like a business is...well, a business.
[/b]

Good luck.
Jeff


Edited Jun 26 2010, 03:32


Brandon Ellis

from Dayton, OH

Apr 26 '07, 06:49 PM


Thanks guys, this piece of the puzzle in my business plan development was not coming together, but after talking with you, I think I will get the first deal or 3 under my belt and read the Nolo book Takelberry mentioned in the mean time.


Edited Jun 26 2010, 03:32


Jeff Takle

Real Estate Consultant from Somerville, Massachusetts

Apr 26 '07, 08:27 PM


You can also elect to have the IRS treat your LLC as an S-Corp for tax purposes, so I guess maybe that makes the third LLC " type" .


Edited Jun 26 2010, 03:32


Brandon Ellis

from Dayton, OH

Apr 27 '07, 08:28 PM


Originally posted by "takleberry":
You can also elect to have the IRS treat your LLC as an S-Corp for tax purposes, so I guess maybe that makes the third LLC " type" .

I am not at all familiar with S-corp. I will look that up.


Edited Jun 26 2010, 03:32


N/A N/A

May 24 '07, 08:49 PM


An LLC does not need to make any election. It is taxed as a partnership unless it elects otherwise. And it can't elect to be taxed as an S corp. because that is only available for actual incorporated entities.


Edited Jun 26 2010, 03:36


Brian Jarrett

Real Estate Investor from Beaumont, California

Jun 08 '07, 08:49 PM


Originally posted by "takleberry":
Setting up an LLC is incredibly easy. You don't need a company to do that for you. IMHO that's wasting money. Nolo has a series of books that are completely adequate to show you the pieces that need to be in place. Go to your library and get the Nolo book or have them borrow or order it for $40 on your own. Should take 30 minutes to skim through and you're all set.

Every state has different fees, etc. You can set up an LLC in any state, but you'll need a designated agent in whatever state you set up in case you're ever sued--they want a physical address to deliver notices to, taxes, etc. Again, the easiest solution is to ask a friend/family who live in the state you're starting the LLC (if it isn't your home state) to act as your agent. They'll probably never get any paperwork from the state.

There aren't three different kinds of LLCs as you mentioned; not that I know of. Just single-member LLCs and partnership LLCs. Some states don't allow single member LLCs and most have restrictions on the maximum number of partners. You will want to decide if you'll have partners or not. A single-member LLC (just you alone) is really easy to file tax-wise. It's just a Schedule C which any TurboTax program can do for you. If you have 2 or more members, then you'll have to file a partnership returns and generate K-1s for each member. TurboTax doesn't do those well and you'll probably end up getting an accountant ($$$) to file that for you. More paperwork.

If it's just for investing, my advice is to keep it as a single-member LLC, file with your state (takes 10 minutes) to set up the LLC, pay the fees, get an Employee Identification Number (EIN) from the IRS website, set up a solo-401(k) through your new LLC to tax-defer income into your retirement accounts, and you're off and running.

Your taxes can vary widely so it pays to look at each state's annual fees, as well as your county taxes for business license, gross sales receipts tax, etc. Nolo has a nice index in the back of the book to help you compare all states. You'll have to research counties yourself.

[b]Starting an LLC is very easy. Running it correctly, paying all the right taxes at the right times, and making it function like a business is...well, a business.
[/b]

Good luck.
Jeff

This is excellent info. I had never thought of setting up a 401K through the LLC. I currently have 401K through my employer, but do not max it out. I max out the employer match and use my extra money for real estate. Since I would also be an employee of the LLC, I could contribute the remainder up the the Federal limit of $15.5K tax free. Any other tid bits like this that I should know before setting up the LLC wouldd be greatly appreciated. Thanks!


Edited Jun 26 2010, 03:38


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