291: Business Credit Strategies for Real Estate Investors

SHOW NOTES FOR EPISODE 291: BUSINESS CREDIT STRATEGIES FOR REAL ESTATE INVESTORS

You don’t need a special certification, degree or license to become a real estate investor, however, your business needs one key thing for long term success — good credit!  In this special podcast episode, author and credit expert Gerri Detweiler shares insider business credit information and tips that will help you utilize little known credit resources for maximum real estate  investing success.

What You Will Learn

• What the big difference is between consumer and business credit
• Why business credit is important to real estate investors
• The best types of credit newbies should establish first
• How to keep your business credit info off of your consumer credit reports
• What the 3 key areas are that affect your business credit rating the most
• The key accounts you can easily obtain to build your business credit fast
• What are the biggest mistakes newbies make when trying to build business credit?
• Why it’s better to NOT to establish credit as a real estate business

About Our Guest

Gerri Detweiler

Credit expert Gerri Detweiler is Education Director for Nav, a website which provides business owners with simple tools to build strong business credit and financially healthy companies.  She’s been interviewed for more than 3000 news stories with such media outlets as The Today Show, Dateline NBC, The New York Times, USA Today and Reader’s Digest.  She has also appeared multiple times on Fox Business, CNN and other television programs across the country and answered over 10,000 credit questions online.  Her articles have been widely syndicated, and she is the author or co-author of five books, including Finance Your Own Business: Get on the Financing Fast Track with previous Old Dawg guest Garrett Sutton.  She has hosted her own radio show and testified before Congress on consumer credit legislation.

More About Gerri

• Her name is Deitweiler (Sounds like Debt-Whiler – haha) – She says it was fate that she would go into the credit business
• Started her career in Washington DC with an advocacy group focused on credit issues.  Some of the things they accomplished:
  • Consumer access to free credit reports
  • Legislation that requires credit card companies to disclose interest rates BEFORE you order your new card
  • She wrote the first mass market book on FICO scores
• 10 years ago she met Garrett Sutton (corporate attorney, Rich Dad adviser, author and previous Old Dawg Guest on episode #011)
  • He said a lot of his clients were running into problems with business credit
  • Together, they co-wrote Finance Your Own Business: Getting on the Financing Fast Tract
• Shortly thereafter, she found out about Nav, contacted the CEO and has been working with them ever since
• She blends personal and business credit in her approach

Business Credit vs. Personal Credit

• Business Credit
  • There are commercial credit reporting agencies that collect credit data and sell it to businesses, insurance companies, lenders, etc.
  • The big difference is that commercial agencies can sell the info to anyone, whereas consumer credit agencies have legal restrictions under federal law selling your personal credit info
  • Business credit reports tells the story of that business
  • Helps the other party to make decisions on doing business with that business
  • Three major business credit bureaus are:
    • Dunn & Brandstreet
    • Experian
    • Equifax
  • If you have a corporation, LLC, etc., you may already have a credit report without knowing it

Why Does Business Credit Matter to Real Estate Investors?

• It helps you to separate your business credit from your personal credit
• You want to minimize as much as possible the impact of your business on your personal credit
• Both are important
• The goal is to move away from personal credit so you can do more transactions in the name of your business and have little or no impact on your personal credit as your business grows
• If you have personal credit cards with large available credit lines and you need money quick for your business, sometimes its just easier to put the business expense on your personal credit card
• However, if you have high balances on your personal credit cards, for example, to do short term transactions (perhaps flipping rehab costs) for your business, it can seriously impact your personal credit scores
• The second most important factor in your consumer credit scores is the debt you are carrying – the percentage of your available credit to the amount you are using.  The closer you get to your credit limit, the more it impacts your score
• Some real estate investors she knows have seen their credit fluctuate from 40 to 75 points a month based on the high balances on their personal credit cards
• A TIP: Get a business credit card that doesn’t show up on your personal credit so that, if you do need to tap into  funds for your business, you can do so without affecting your personal credit.  But note:  If you default on your business card, they will report it to your personal credit reports.  Most don’t report to your personal credit if you pay on time
• Here is an article she wrote on which business cards report to your personal credit reports: https://www.nav.com/resource/do-business-credit-cards-report-to-personal-credit/
• All business credit card providers do check your personal credit reports before hey approve your business card and it will show as an inquiry on your personal credit report (which does have a slight impact on your credit score because the more inquiries you have, the lower your credit score)
• As long as you have decent personal credit scores and meet the income requirements from all sources (not just your business), you can get one of these cards.  They don’t require personal guarantee but if you default, it will show up on your personal credit reports
• SBA loans, for example will look at your business and personal credit scores

Three Legs on the Business Credit Stool

• The key factors affecting you getting business credit are:
  • Credit: Business and Personal needs to be strong
  • Time in business (when you started your business).  Businesses that have been around longer are better risks because they have survived
  • Revenue
• If these are in good shape, then you have more options:
  • More attractive financing options
  • Lower costs
  • Better rates
• If you set this foundation when you start, as early as you can, then you set yourself up for a better chance of success

What Types of Business Credit Can a Real Estate Investor Use?

• Business credit cards – credit for fix n’ flip, rehabbing
• Credit for vendors that don’t report to personal credit report but DO report to commercial credit bureaus
  • Home Depot
  • Dell
  • Companies that are easier to get lines of credit for new businesses that report to commercial credit bureaus and, therefore, help you establish business credit sooner:
    • Grainger – Safety, electrical, HVAC
    • U-Line – Boxes
    • Quill – Office Supplies
    • Here’s an article with more details: https://www.nav.com/blog/3-vendors-will-help-build-business-credit-22833/

How You Can Separate Your Business and Personal Credit

• Many real estate investors have many business entities (multiple LLCs for multiple properties)
• She recommends that you have ONE MAIN LLC or other business entity that you focus on to establish your business credit
• This entity often is more focused on marketing or management (because it is easier to get credit in those areas than real estate alone)
• There are SIC codes that identify your industry.  Real estate is considered higher risk.  Marketing or management is not
• For example, a lady in real estate, also had a property management and marketing company.  That was the one that she used to build credit.  The other LLCs were  used to hold properties

Common Credit Mistakes Done By Real Estate Investors

• A real estate person she met at a speaking engagement was told to keep her credit cards at 17% utilization.  This is not necessarily true.  FICO doesn’t work like that
• Many people pay lots of money for credit repair companies but they do things you could do yourself – without spending all the money
• Spend a little time every month to monitor and track your credit very carefully
• Credit is very important to your business.  It you are not careful, it can seriously set your business back
• A very successful business investor paid cash for his open heart surgery
  • He received many bills from the hospital and generally paid them all
  • One for only a few hundred dollars slipped through the cracks, without him knowing and hit his credit report as a collection account
  • His credit report dropped 75 points
  • This can cause tremendous problems if you are a real estate investor

Best Credit for Newbies

•  Mortgages are are alright and they treat it differently than credit card debt
• Getting a good business credit card that does not report to your personal credit reports can be very effective
  • Not the cheapest but not the most expensive
  • Average rate – 17%
  • If you can get 0% on transfer balance for 12-18 months
  • You can get the money transferred into your checking account and use it interest-free for that time
• Next, get vendor accounts
  • Credit lines through vendors you regularly use (building supplies, paint, furniture, etc.)
  • They extend credit on terms where you issue a PO and you pay it later.  Good for cash flow
  • Get Net 30, Net 60, Net 90 terms
• Business credit cards are not covered by the Credit Card Act – the federal law that protects us against changing interest rates any time for any reason
  • For example, if you pay a consumer credit card late, they are not going to change your interest rate.  With business credit cards, they can change “penalty rates” to like 28% overnight

Other Factors Affecting Your Efforts to Build Up Business Credit

• Payment history is extremely important with business credit.  Maybe more important than with personal credit cards.  With consumer credit, they will wait 30 days, when you are late, before reporting it to the credit bureaus
• Business credit uses DBT (Days Beyond Term).  So, if you have terms with a vendor, let’s say, Net 60, and you pay on day 62 it’s reported as “2 DBT”
• You need to set up systems to insure that things get paid on time
• NAV (her company) has a marketplace where they work with over 30 different lenders and they help match their customers with a compatible lender for their needs (lines of credit, term loans, etc.)
• Please note, you will likely need another entity (like a marketing business, for example), besides real estate, to get these loans
  • They will want to see revenues and time in business
  • You’ll need a separate business account for that entity
  • The lender will want to see bank statements or tie into your business bank account to see what’s going in and out

Dunn & Bradstreet

• The oldest credit bureau in the U,S,
• Abraham Lincoln worked for D&B at one time – in fact, 4 former presidents worked as reporters for D&B
• They sell a lot of credit data
• They have the D&B PAYDEX score (business rating)
• If you want to do business with the government or get a SBA loan, you will a Dunn’s number
• They do offer products that will speed up the business credit building process.  NAV, however, offers to do the same thing for free!
• Nav has a free tool called “Business Launcher”
  • Guides customers through the process of building business credit
  • It works with a variety of business credit bureaus (D&B, Equifax & Experian)
• If you are in a rush and have reason why you need to build up business references fast, D&B has services that you can pay them and they will add reference accounts to your business credit faster

Business Credit Score Disclosures

• Unlike consumer credit, there is no federal requirement that says your business credit scores has to be shared with you EVER, even if…
  • you’re turned down for credit
  • you’re a victim of fraud
• NAV shares business credit scores for free and gives customers tools to build strong business credit and financially healthy companies

Business Identity Theft

• Growing problem
• With consumer credit, when there is identity theft, you can have credit freezes – making it more difficult for people to steal people’s identity and access their credit
• Business credit is easier to access and doesn’t have the protections that consumer credit has
• Most people aren’t regularly accessing/monitoring their business credit, therefore, thieves are finding ways in
• She met a woman who said someone opened a business credit card in the name of her business.  Found out about it because businesses were contacting her relatives saying she wasn’t paying her bills
• It’s a good idea to check your business credit once a month for free, just to make sure it is alright

NAV

• Referred to as the CreditKarma (a free online consumer credit service) for small business
• At Nav
  • you can check personal and business credit free monthly
  • Access credit options in their marketplace

Advice for Old Dawgs Interested in Real Estate Investing and Building Business Credit

• People over 50 have an advantage
• Statistics show that with your personal FICO credit score, people with longer credit history tend to have better credit scores
• 25 plus years of credit history is very positive and gives you more leeway
• If you have a higher credit balance (35%) it will not greatly impact your rating as it would for younger people in their 20s and 30s, with a shorter credit history, whos credit score may drop 20-30 points
• If you have a strong credit score and you get a negative item, it can hit your score harder than someone with a lower credit score
• You have to protect your credit

Other Credit Available for Businesses

• Online loans (term loans, lines of credit, receivables financing)
  • Lots available
  • Interest rates do vary, so be careful
  • Interest rates may not be stated as an APR
• SBA Financing
  • Does have loans for real estate investors
    • 7A Program
    • 504 Program
  • Guaranteed up to a certain percentage
  • Very stringent rules to meet the qualifications
  • Rates, terms are attractive
  • Very predictable financing
  • Can be a lengthy application/approval process
  • Smart Biz can accelerate the application process
• Your qualifications dictate what type of loan you can get
• The “Trade-Off” when applying for business loans
  • The more effort you put into preparing for financing, the less you will have to pay
  • The less effort you put in, the more expensive it will be
• One online lender said that 20% of their applications come in between 6 pm and 6 am
  • Entrepreneurs that are working late, trying to solve an immediate need to cash
    • You don’t want to be in that situation

Rap it Up

• Favorite real estate book: Rich Dad Poor Dad by Robert Kiyosaki
• Favorite business book: The Plateau Effect by Bob Sullivan
• Most valuable web site for success (other than your own): AllBusiness.com
• Favorite app: Timeular
• Favorite quote: “Just because you can’t do everything, doesn’t mean you can’t do anything.” – Gerri Detweiler
• If you had to start all over, knowing what you know, and you only had $1,000, what would you do to launch your real estate investing business? She would buy a website (it’s some of the cheapest real estate available).

How to Reach Gerri

• Website: Nav.com
• Email: Gerri@nav.com

Special Offer for Old Dawg Listeners

• To get a FREE 30-DAY NAV PREMIUM ACCOUNT!
  • To sign up for NAV is free
  • But to get extended services, like full detailed credit reports, you need the premium account
  • Here is a way for you to get that service free for  30 days
  • Go to Nav.com/freeaccount.  When they ask for promo code, type in podcast

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