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 the IRS to track your business

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