Posted about 4 years ago

How to establish Business Credit in 6 Easy Steps

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How to build business credit in 6 easy steps

A few days ago I had the opportunity to talk to an amazing young lady who is only 19 years old, and is passionate about gaining knowledge about real estate investing. One of the things we talked about is credit building. Since she is very young, I suggested that her priority should be to set up a good credit building strategy over 12 to 24 months, as I feel this should be the foundation of any long term real estate acquisition endeavor. In this post I am going to cover the very basics of building business credit for those that have never had any dealings with the process. There is no single “right way” to do this, but this is the method that has worked for me, and friends I have suggested it to. Improving your personal credit score should be part of your credit strategy as well, and this method can also be applied to the personal side.

STEP 1: FORM A LEGAL BUSINESS ENTITY

My credit strategy includes the formation of a business entity; you can choose the best one that suits your needs. If you are unfamiliar with the different types of business entities, there is a mountain of good books that will adequately explain the types, and differences between them. I will include a link to my favorite at the end of this post. A legal business entity is like another person, with their very own credit profile that you control. What isn’t great about that!?

STEP 2: OBTAIN AN EMPLOYMENT IDENTIFICATION NUMBER (EIN) FROM THE IRS

This step is easier than it sounds; simply go to this page http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Apply-for-an-Employer-Identification-Number-(EIN)-Online and follow the directions. Within a short time you will have your EIN number. (No you do not need employees)

STEP 3: OPEN A BUSINESS BANK ACCOUNT

Take your articles of organization, and poof if your EIN number and head to the bank that suits your needs, and tell them you would like to set up a business bank account. Within an hour your business will have a brand spanking new bank account. Don’t forget that most accounts require a minimum deposit.

STEP 4: APPLY FOR AT LEAST 3 SECURED BUSINESS CREDIT CARDS THAT REPORT PAYMENT ACTIVITY TO BUSINESS CREDIT AGENCIES

Most business secured credit cards with banks require a minimum deposit of at least 500 dollars, pass on that new iphone, or ipad,and invest in your business. You can have multiple business entities “sitting on the shelf” building longevity, and credit history. These unsecured cards might have small credit limits now, but they will be the building blocks to thousands of dollars in unsecured credit in the future if managed responsibly. You do not have to get all 3 at one time, but make a reasonable effort to open them as fast as money allows.

STEP 5: UTILIZE ONLY 30 PERCENT OF YOUR AVAILABLE CREDIT AND MAKE PAYMENTS ON TIME!!!!!!

This is the most crucial step in the process; you must make your payments on time, even if you have no food in the refrigerator, MAKE THE CREDIT CARD PAYMENT, if you have no gas in the tank, MAKE THE CREDIT CARD PAYMENT. I can’t repeat it enough.

STEP 6: SIT BACK AND WAIT

Figuratively of course, this is a strategy based on time. The credit offers will not start rolling in overnight. Be patient; allocate time to other parts of your overall real estate strategy, keep making progress in other areas, and in time you will have that unsecured 100k credit line, but don’t tell the girl or guy you met on match.com that your card has 100k limit, but alas, that is a mistake to be written about another time. After a short period of time of making responsible payments, most banks will convert your secured card to an unsecured card, and you will get your deposit back, plus the interest it has earned. Usually this is when the unsecured lines of credit offers will start clogging your mail box.

Your level of discipline, determination, and your ability to sacrifice for the promise of future rewards will determine how successful you become with these steps. Good luck in your credit and real estate endeavors. Check out my profile to find out more about me.

BL

A good book to learn about different types of business entities:

http://www.amazon.com/Start-Your-Own-Corporation-Companies/dp/1937832007

Secured Business Credit Card: A Line of credit extended to your business secured by a deposit of cash to the bank.

Unsecured Business Credit Card: A line of credit extended to your business based on your credit history, no deposit is required.

Employment Identification Number: A number used by theIRS to track your business

If there are any other terms you are unsure of be sure to contact me, and I will gladly explain



Comments (28)

  1. Thank you for sharing such helpful information  Brandon. 


  2. As a business owner. I can attest that building a business's credit can be challenging and takes time. 

    When I first went to interview banks to start a business. I would usually get this response.... Banker: So how long have you been in business? Me: " in my first year".  The following response was .... Banker: We need you to be in business for 2-3 years before we can consider loaning you money. Me: Even with my history and positive net income. Banker: Yes have a great day!! In my opinion its is a catch 22. You need money to grow your business, but they will not lend you money without being in business.  

    I was blessed to have savings to be able to start my business with out loans, but I can see how many have had to struggled to be able to get there business started. I know that this was just my experience and there are many options for lending an way of starting. I just wish that banks put more faith in business plans, process, people and applicants proven track record rather then there prescreening process that shut down aspiring entrepreneurs. Who knows maybe one day they will.

    Long story made short here... I agree that this avenue of getting a business set up and asking for credit card through the bank can be a great means to start gaining credit for your business. Make sure to always keep up on payments and that you are not going over that 30% mark. Great Tips!!!! Thanks!!! 


  3. Good information.  My Credit Union where I have my LLC business accounts has a business CC but it needs 3 years of tax returns where I only have 2.  So I have to wait another4 months or so but plan on doing this with the 1 card.  Good advice.


    1. Check out a business secured card. A deposit will be required, but in my experience no documentation was required.


      1. noticed different secured business cards report to credit agencies differently and that qualifications can vary between card companies. 

        Could you suggest where to look regarding what you find to be some of the best business secured cards?


  4. This post has excellent information! Thanks Brandon!


    1. Thanks for reading, I am glad you found it useful. Feel free to reach out privately if you have any other questions :)

  5. Nice post!


    1. Thanks for the kind words Reginald :)

  6. Thanks for sharing the knowledge!


    1. Thanks for reading Winnie, If you have any questions feel free to reach out :)


  7. Great post. Thanks for sharing!


  8. That is just excellent advice. I'm new to BP, but posts like yours are proof of the invaluable resources that are stored on here.

    Thank you.


  9. @Brandon L. just came across this article, some good information you have supplied and another method in getting established. 


    1. Thanks for reading and taking the time to comment Paul


  10. @Brandon L. Thank you for your article.  Is it better to maintain a 30% balance of your credit limit or should you pay off the balance each month like your personal credit cards in order to build your business credit experience?  


    1. @Deshan Kennedy based on my research, and what I have been practicing. The banks, or anyone else that extends you credit, want to see that you can manage it responsibly. They also want to see that the card is being used, what I do is keep the balance below 30 percent, and I pay on it monthly, but there are times when it goes between the 30-50 percent range if I have unexpected expenses. Utilization and responsible management without over-extending your card are the important things to remember.

      Also, if you have never heard of "Net 30" accounts I would suggest looking into them. They are vendors that will provide your business a line of credit, some with no personal guarantee, or income requirements. These must be paid off monthly, and will reflect positively on your business credit score.  


      1. hey Brandon, thank you for all your tips and knowledge. i have been working on my score and i have a business merchant account bt no business credit as it is a dba account? my score is very high and excellent history but my issue is i only have less then a year in taxes so far so no returns to give bank for a conventional loan?im trying figure out how i can buy investment property without my returns as you need 2 years for low interest loan through bank?


  11. This is a great post.  I would encourage people looking to establish unsecured lines of credit to monitor their personal credit and business credit at creditera.com


    1. Hey chad thanks for taking the time to leave a comment. I am in no way affiliated with that website, but I have tried thier services and found them very convienant to follow all scores. 


  12. @Brandon L. really interesting post. I'd like to have you as a guest on my podcast to discuss this strategy. I'll send you a message 


  13. Hey Daniel, thanks for the comment, what you are saying was true for me about  3 years ago, but in my area most of the major banks now have a secured card for business. Google was no use to me, I had to go to each banks website. Be prepared for the bankers to not know what you are talking about as well, I had to have the page from the banks website pulled up on my phone to educate each banker on their services. I will put together a separate blog post on the institutions offering these services. 


  14. I have heard of this before but finding secured business credit cards is not as easy as said done. Not only that you have to have 3 X Secured card funds up front. Maybe a resource on business secured credit cards is in order?


  15. No problem guys I'm glad you find it useful, I used the same steps on my personal credit as well. 


  16. Nice, very clear steps. Thank you


  17. I will have to take advantage of this.  I was just trying to figure out how to use an LLC to purchase a property when it has no credit history.  This is perfect!  Booking marking for reference, thanks!