How’s your credit score doing today? Are you proud of it? I know that you have probably spent many hours trying to increase your score, reviewing strategies, and trying to correctly navigate the credit world.
What if I told you that now you should do the same for your business credit? “But Josh, I don’t have a business yet.” Great, it is even better to start right now. This way, when you start your business, you will have built up your business credit.
Think of it like this. You start building your personal credit score well before you actually buy a house. By learning about business credit well before you start your business, you will be in a great position to leverage your score.
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This article is based on two great references. The first is the book “Zero Down” by Monica Main. She describes, in great detail, how to leverage your business credit in order to run a real estate business. She concentrates on buying apartment buildings, but you don’t have to use your business credit for this.
The next reference is an article that just can across my feed. It is on Nav.com. This is a more detailed analysis of the early process of building business credit, plus links to more information. This article also has a lot of advice in the comment section.
So how do you build business credit without having a business, per se? Back to “Zero Down”, she recommends starting an S Corporation that will in turn own your LLCs. For example, I would start an over-arching S Corp named “Josh Corp” and then open an LLC for my website and another LLC for a rental home. I would build my business credit through my larger S Corp, that way it can leverage its credit for all my “baby” businesses. (This is not legal advice, please see a business lawyer for a precise way forward.)
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If this is way over your head, do not worry. I am here to open your mind to the possibilities. Once you know that something exists, it is time to take action and gather more information. Once you have your business entity set up, then you will receive an Employer Identification Number. This is the “social security” number for your business. Using your EIN, you can start building your business credit. “Zero Down” breaks down the 3 major steps of your business credit. They are business credit cards, business lines of credit, and business loans.
Business Credit Card. This is where you will start. You may only get a limit of $1000, but that is okay. Remember, since you have no business credit at this point, your personal credit score will be used. Ensure that your personal credit is in tip-top shape before you start this process. Using your business credit for business expenses is now a priority. You want to show that you are a good steward of the banks’ money. “Zero Down” has a ton of cards that you should start with. As you get seasoned, you should either be getting credit limit increases naturally, or by requesting them. Either way, you want to have a high limit, with low usage.
Business Line of Credit. This is a little higher on the chain than a credit card. Plus your interest rates may be better. The same thing goes for this. You may start with $10,000 but over time you can work your way up to $50,000. Always pay on time and start to think of the bank as a person and not just an entity. You want to establish a great relationship with your bank.
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Business Loan. This is the granddaddy of them all, and it is tough to work up to this level. Please read “Zero Down” for a deep dive. Having access to business loans can completely change the trajectory of your businesses. Most people are not in a position to get a business loan. It takes foresight and preparation to get to this point.
But Josh, what is the point of having all this credit? The point is that you never know what business opportunity may present itself. If you are a true entrepreneur, you realize that opportunities present themselves all the time. You want to have the resources to act in these situations.
Yes, you can use your own money, if you’d like. My favorite author, Robert Kiyosaki, says it best “Using your own money requires no financial education”. Also, using your own money will limit your ability to seize opportunities because you don’t want to overextend yourself. Let’s go over a couple of examples of when having business credit will be extremely useful.
Living in a low cost of living state like Florida presents many opportunities. It is perfectly normal to find a home for $100,000 that can produce great rental income. However, you will need a $20,000 down payment. I personally don’t want to use my own $20,000. If I had a business line of credit, I could withdraw that down payment from there and use it as a down payment with another bank. Then the income from the home will pay back both loans. If you executed an amazing deal, you should easily be able to cover both. That’s why it requires financial education to leverage debt. You will need to be able to crunch the numbers.
Let’s say that you have a cake business and you want to start delivering cakes. You want to buy 3 cars. Each will cost you $10,000 for a total of $30,000. Again, I don’t want to use my own money. You do the math, and buying 4 cars will be better for you. 2 for deliveries and 2 for Turo. The Turo cars can completely cover the cost of all 4 cars. You cannot put 4 cars on your personal credit. However, since you have been working on your business credit score, you can purchase the vehicles.
These are just a couple of situations, more will happen every day. Having a credit line not tied to your personal credit is a must for any business owner. But you will have to take the process seriously. I cannot stress enough, read this book, “Zero Down”. She knows what she is talking about. The book is named Zero Down because she talks about purchasing apartment buildings with none of her own money. Apartment Buildings. How much financial education do you think it takes for that? I personally like the challenge of using financial education versus using my own money. How about you, will you be able to leverage business credit to grow your wealth?
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https://www.pinterest.com/kingmarine/military-family-investing/Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
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