Every business has three types of credit: the Consumer Credit of the business owner, Bank Credit, and Business Credit.Most business owners are familiar with their consumer credit. This is credit that reports to the consumer credit reporting agencies TransUnion, Equifax, and Experian. Scores range from 350-850, and credit is linked to the owner’s Social Security Number.Most business owners don’t know that banks have their own internal scoring system for businesses. This scoring system is known as bank credit, or a bank rating.
This score is based on how you manage your business bank account. Having $10,000 or more in your bank account will give you a good bank credit score.A business also has its own credit profile, known as business credit. Business credit reports to the business credit reporting agencies, Dun & Bradstreet, Equifax, and Experian. Scores usually range from 0-100, and credit is linked to the business EIN number, not the owner’s SSN number.Business credit provides a lot of benefits. For one, it has no link to consumer credit, so no personal credit check is required, and accounts don’t report to the consumer agencies.No personal guarantee is needed in most cases, so you won’t be personally liable for your business debts. Also, credit limits are 10-100 times higher than with consumer credit.With consumer credit, just because you have an SSN doesn’t mean you have an established credit profile.To get a consumer credit score and profile, you first must: get approved for accounts that report to the consumer reporting agencies, use those accounts, and pay your bills for those accounts, then and only then will you have an established credit profile and score for your SSN.Just like with consumer credit, just because you have an EIN doesn’t mean you have an established business credit profile and score.To get a business credit score and profile, you first must: get approved for accounts that report to the business reporting agencies, use those accounts, and pay your bills for those accounts, then and only then will you have an established credit profile and score for your EIN.Entrepreneur.com reports that 90% of business owners know nothing about business credit. Business credit is usually reserved for established businesses, or those that meet a certain criteria for approval, and often is used by companies big enough that they have a CFO.You can build business credit and get a good score QUICKLY! Having business credit increases the value of your company, and you won’t need financials or collateral for approval.Any business can actually establish business credit, but the key to success is knowing the formula for success, knowing what steps to take and in what order.
Business credit isn’t highly promoted in stores, or with cash credit sources, so usually only larger businesses take advantage of it.Credit issuers and lenders like it this way, because usually those larger companies are more established and have less of a risk of default, although it’s not actually the size of your company they look at for approval.To get approved your business must pass a test that shows the credit issuers and lenders that you are credible, no matter your size.If you pass this test and are credible in their eyes, you’ll be approved for business credit. Many times you get approved automatically by their computers without someone manually reviewing your application.Business size and how long you’ve been open aren’t really the driving factors for your approval, but passing this test is.This means even if you just opened your doors yesterday and have little or no revenue, you can still be approved with most business credit sources… as long as you pass their test.You must have a physical business address, or use a virtual address. You’ll need to have a business phone number, preferably a toll free number, and it’ll need to be listed in 411.You’ll need a business fax number and you should have a professional email address, and website. You must have the proper licenses for your business, industry, city, county, and state and you need an EIN, entity setup, and bank account.There are actually 20 items on this test that will be reviewed, but you now know some of the most important factors that credit issuers and lenders review.When establishing business credit, there are actually three types of credit you can get: vendor credit (starter accounts that offer Net 30 terms), store credit (revolving credit cards available in retail stores), and cash credit (revolving credit cards such as Visa and MasterCard that card issuers or banks approve you for).The biggest mistake entrepreneurs make when building credit for their business is that they try to apply for store or cash credit first, and skip vendor credit.But stores and banks will NOT approve a business owner for credit until their EIN credit profile and score are established. If you try to apply for store or cash credit without an established business credit profile and score, you’ll be denied… 100% of the time.You must get approved with vendors first who offer Net 30 terms. After you use those accounts and pay your bills, the accounts will get reported to the business credit reporting agencies.Then and only then will you have an established business credit profile and score. Once it has been established, you can begin to be approved for store revolving credit.You should seek out vendors who will approve a business for credit, even if none is established yet. There are actually many vendor sources who are well known for this: Uline, Quill, Reliable, and Laughlin and Associates, just to name a few.To start business credit, you first should get approved for accounts with these vendors.Some will require you purchase their products first and some will have you make three orders and pay before they’ll issue you a line-of-credit. But all of the sources I listed will approve a brand new business, even if you have no credit now.You’ll want to insure you have a total of five payment experiences reported before you even think of applying for store credit. A payment experience is the reporting of an account to a business reporting agency.So Quill, for example, reports to both D&B and Experian. That means that one account will count as two payment experiences. Laughlin only reports to Experian, counting as one payment experience.Once you have five payment experiences reporting, you can begin to secure revolving store credit cards for your EIN.KEEP IN MIND, all applications will ask for your SSN but you do NOT need to provide your SSN on the application. If you do supply your SSN, they WILL pull your personal credit… and if it’s bad your application will be denied.When you leave the SSN field blank, they’ll pull your business credit. Once they see that you have business credit established and at least five payment experiences reporting, then you’ll start to get approved for store credit.Most major retailers do offer business credit as well as consumer credit. Staples, Office Depot, Home Depot, Lowes, Target, Walmart, Costco, Sam’s Club, Radio Shack, Best Buy, BP, Chevron, Amazon, Shell, and most other stores, offer business credit.Some sources like Home Depot might have more stringent approval requirements and want to see big revenue and three years in business for approval of no personal-guarantee credit. However, sources don’t have these requirements, if you have credit established for the business.WARNING!!! Do NOT put your SSN on the application. Do NOT apply for revolving store credit without having at least five payment experiences reporting to the business credit reporting agencies. If you do either of these, you’ll be denied or you’ll have to give them your personal guarantee.Once you have a total of 10 payment experiences reported to the business bureaus, then you can start to get cash credit cards. Cash cards are those issued by Visa, MasterCard, even AMEX, and are cards you can use anywhere, not just cards you can only use in one store.It’s recommended that at least one of your 10 payment experiences has a high limit of $10,000 or more before applying for cash credit. Dell is a revolving store source who regularly approves business owners with established business credit for an account with a limit of $10,000 or more.Key Bank and Home Depot are two sources that offer revolving cash credit cards you can use most anywhere; many banks offer these also.When you follow these steps, your business can have an established credit profile and score.This profile and score can then be used to get you credit in your business name, regardless of your personal credit, and without a personal guarantee.You’ll want to continue building business credit, applying and getting more credit, using that credit, and getting approved for higher and higher credit limits.

So… You may ask yourself, why should you buy or invest in real estate in the First Place? Because it’s the IDEAL investment! Let’s take a moment to address the reasons why people should have investment real estate in the first place. The easiest answer is a well-known acronym that addresses the key benefits for all investment real estate. Put simply, Investment Real Estate is an IDEAL investment. The IDEAL stands for:• I – Income
• D – Depreciation
• E – Expenses
• A – Appreciation
• L – LeverageReal estate is the IDEAL investment compared to all others. I’ll explain each benefit in depth.The “I” in IDEAL stands for Income. (a.k.a. positive cash flow) Does it even generate income? Your investment property should be generating income from rents received each month. Of course, there will be months where you may experience a vacancy, but for the most part your investment will be producing an income. Be careful because many times beginning investors exaggerate their assumptions and don’t take into account all potential costs. The investor should know going into the purchase that the property will COST money each month (otherwise known as negative cash flow). This scenario, although not ideal, may be OK, only in specific instances that we will discuss later. It boils down to the risk tolerance and ability for the owner to fund and pay for a negative producing asset. In the boom years of real estate, prices were sky high and the rents didn’t increase proportionately with many residential real estate investment properties. Many naïve investors purchased properties with the assumption that the appreciation in prices would more than compensate for the fact that the high balance mortgage would be a significant negative impact on the funds each month. Be aware of this and do your best to forecast a positive cash flow scenario, so that you can actually realize the INCOME part of the IDEAL equation.Often times, it may require a higher down payment (therefore lesser amount being mortgaged) so that your cash flow is acceptable each month. Ideally, you eventually pay off the mortgage so there is no question that cash flow will be coming in each month, and substantially so. This ought to be a vital component to one’s retirement plan. Do this a few times and you won’t have to worry about money later on down the road, which is the main goal as well as the reward for taking the risk in purchasing investment property in the first place.The “D” in IDEAL Stands for Depreciation. With investment real estate, you are able to utilize its depreciation for your own tax benefit. What is depreciation anyway? It’s a non-cost accounting method to take into account the overall financial burden incurred through real estate investment. Look at this another way, when you buy a brand new car, the minute you drive off the lot, that car has depreciated in value. When it comes to your investment real estate property, the IRS allows you to deduct this amount yearly against your taxes. Please note: I am not a tax professional, so this is not meant to be a lesson in taxation policy or to be construed as tax advice.With that said, the depreciation of a real estate investment property is determined by the overall value of the structure of the property and the length of time (recovery period based on the property type-either residential or commercial). If you have ever gotten a property tax bill, they usually break your property’s assessed value into two categories: one for the value of the land, and the other for the value of the structure. Both of these values added up equals your total “basis” for property taxation. When it comes to depreciation, you can deduct against your taxes on the original base value of the structure only; the IRS doesn’t allow you to depreciate land value (because land is typically only APPRECIATING). Just like your new car driving off the lot, it’s the structure on the property that is getting less and less valuable every year as its effective age gets older and older. And you can use this to your tax advantage.The best example of the benefit regarding this concept is through depreciation, you can actually turn a property that creates a positive cash flow into one that shows a loss (on paper) when dealing with taxes and the IRS. And by doing so, that (paper) loss is deductible against your income for tax purposes. Therefore, it’s a great benefit for people that are specifically looking for a “tax-shelter” of sorts for their real estate investments.For example, and without getting too technical, assume that you are able to depreciate $15,000 a year from a $500,000 residential investment property that you own. Let’s say that you are cash-flowing $1,000 a month (meaning that after all expenses, you are net-positive $1000 each month), so you have $12,000 total annual income for the year from this property’s rental income. Although you took in $12,000, you can show through your accountancy with the depreciation of the investment real estate that you actually lost $3,000 on paper, which is used against any income taxes that you may owe. From the standpoint of IRS, this property realized a loss of $3,000 after the “expense” of the $15,000 depreciation amount was taken into account. Not only are there no taxes due on that rental income, you can utilize the paper loss of $3,000 against your other regular taxable income from your day-job. Investment property at higher price points will have proportionally higher tax-shelter qualities. Investors use this to their benefit in being able to deduct as much against their taxable amount owed each year through the benefit of depreciation with their underlying real estate investment.Although this is a vastly important benefit to owning investment real estate, the subject is not well understood. Because depreciation is a somewhat complicated tax subject, the above explanation was meant to be cursory in nature. When it comes to issues involving taxes and depreciation, make sure you have a tax professional that can advise you appropriately so you know where you stand.The “E” in IDEAL is for Expenses – Generally, all expenses incurred relating to the property are deductible when it comes to your investment property. The cost for utilities, the cost for insurance, the mortgage, and the interest and property taxes you pay. If you use a property manager or if you’re repairing or improving the property itself, all of this is deductible. Real estate investment comes with a lot of expenses, duties, and responsibilities to ensure the investment property itself performs to its highest capability. Because of this, contemporary tax law generally allows that all of these related expenses are deductible to the benefit of the investment real estate landowner. If you were to ever take a loss, or purposefully took a loss on a business investment or investment property, that loss (expense) can carry over for multiple years against your income taxes. For some people, this is an aggressive and technical strategy. Yet it’s another potential benefit of investment real estate.The “A” in IDEAL is for Appreciation – Appreciation means the growth of value of the underlying investment. It’s one of the main reasons that we invest in the first place, and it’s a powerful way to grow your net worth. Many homes in the city of San Francisco are several million dollars in today’s market, but back in the 1960s, the same property was worth about the cost of the car you are currently driving (probably even less!). Throughout the years, the area became more popular and the demand that ensued caused the real estate prices in the city to grow exponentially compared to where they were a few decades ago. People that were lucky enough to recognize this, or who were just in the right place at the right time and continued to live in their home have realized an investment return in the 1000′s of percent. Now that’s what appreciation is all about. What other investment can make you this kind of return without drastically increased risk? The best part about investment real estate is that someone is paying you to live in your property, paying off your mortgage, and creating an income (positive cash flow) to you each month along the way throughout your course of ownership.The “L” in IDEAL stands for Leverage – A lot of people refer to this as “OPM” (other people’s money). This is when you are using a small amount of your money to control a much more expensive asset. You are essentially leveraging your down payment and gaining control of an asset that you would normally not be able to purchase without the loan itself. Leverage is much more acceptable in the real estate world and inherently less risky than leverage in the stock world (where this is done through means of options or buying “on Margin”). Leverage is common in real estate. Otherwise, people would only buy property when they had 100% of the cash to do so. Over a third of all purchase transactions are all-cash transactions as our recovery continues. Still, about 2/3 of all purchases are done with some level of financing, so the majority of buyers in the market enjoy the power that leverage can offer when it comes to investment real estate.For example, if a real estate investor was to buy a house that costs $100,000 with 10% down payment, they are leveraging the remaining 90% through the use of the associated mortgage. Let’s say the local market improves by 20% over the next year, and therefore the actual property is now worth $120,000. When it comes to leverage, from the standpoint of this property, its value increased by 20%. But compared to the investor’s actual down payment (the “skin in the game”) of $10,000- this increase in property value of 20% really means the investor doubled their return on the investment actually made-also known as the “cash on cash” return. In this case, that is 200%-because the $10,000 is now responsible and entitled to a $20,000 increase in overall value and the overall potential profit.Although leverage is considered a benefit, like everything else, there can always be too much of a good thing. In 2007, when the real estate market took a turn for the worst, many investors were over-leveraged and fared the worst. They could not weather the storm of a correcting economy. Exercising caution with every investment made will help to ensure that you can purchase, retain, pay-off debt, and grow your wealth from the investment decisions made as opposed to being at the mercy and whim of the overall market fluctuations. Surely there will be future booms and busts as the past would dictate as we continue to move forward. More planning and preparing while building net worth will help prevent getting bruised and battered by the side effects of whatever market we find ourselves in.Many people think that investment real estate is only about cash flow and appreciation, but it’s so much more than that. As mentioned above, you can realize several benefits through each real estate investment property you purchase. The challenge is to maximize the benefits through every investment.Furthermore, the IDEAL acronym is not just a reminder of the benefits of investment real estate; it’s also here to serve as a guide for every investment property you will consider purchasing in the future. Any property you purchase should conform to all of the letters that represent the IDEAL acronym. The underlying property should have a good reason for not fitting all the guidelines. And in almost every case, if there is an investment you are considering that doesn’t hit all the guidelines, by most accounts you should probably PASS on it!Take for example a story of my own, regarding a property that I purchased early on in my real estate career. To this day, it’s the biggest investment mistake that I’ve made, and it’s precisely because I didn’t follow the IDEAL guidelines that you are reading and learning about now. I was naïve and my experience was not yet fully developed. The property I purchased was a vacant lot in a gated community development. The property already had an HOA (a monthly maintenance fee) because of the nice amenity facilities that were built for it, and in anticipation of would-be-built homes. There were high expectations for the future appreciation potential-but then the market turned for the worse as we headed into the great recession that lasted from 2007-2012. Can you see what parts of the IDEAL guidelines I missed on completely?Let’s start with “I”. The vacant lot made no income! Sometimes this can be acceptable, if the deal is something that cannot be missed. But for the most part this deal was nothing special. In all honesty, I’ve considered selling the trees that are currently on the vacant lot to the local wood mill for some actual income, or putting up a camping spot ad on the local Craigslist; but unfortunately the lumber isn’t worth enough and there are better spots to camp! My expectations and desire for price appreciation blocked the rational and logical questions that needed to be asked. So, when it came to the income aspect of the IDEAL guidelines for a real estate investment, I paid no attention to it. And I paid the price for my hubris. Furthermore, this investment failed to realize the benefit of depreciation as you cannot depreciate land! So, we are zero for two so far, with the IDEAL guideline to real estate investing. All I can do is hope the land appreciates to a point where it can be sold one day. Let’s call it an expensive learning lesson. You too will have these “learning lessons”; just try to have as few of them as possible and you will be better off.When it comes to making the most of your real estate investments, ALWAYS keep the IDEAL guideline in mind to make certain you are making a good decision and a solid investment.