How Real Estate Professionals Can Properly Finance Their Business
March 5th, 2008 Categories: Business Models, Incorporation Advice, Real Estate News, The XBanker
My last two posts have focused on the importance of incorporating and the resulting tax savings. I continue here with potential financing options for your corporation.
The goal is to create separation between your business and personal activities. This separation provides for asset protection and the ability to obtain capital for your business.
The scoring of personal credit is inherently biased against business owners and investors, because they don’t fit the typical consumer norms. What most entrepreneurs discover, usually when it is too late, is that their business activities drag down their personal credit - making everything else they do more expensive. In order to preserve your personal credit, you need to have access to non-reporting business financing.
Business financing comes in many forms, such as retail or trade credit, credit cards, vehicle and equipment leases, business loans and lines of credit. The key attribute is that they don’t report on your personal credit report. Some will require no personal guarantee at all! Most bank lines and credit cards will have what I call a “ghost guarantee” - which means that you are approved based on your personal credit, with you personally on the hook, but as long as the account is in good standing nothing will be reported. This helps preserve your personal credit by reducing your revolving debt ratios and personal debt-to-income.
Most business owners get the most excited about business lines of credit. The appeal of $50,000 to $250,000 of available cash credit is a no-brainer. The flexibility to use that credit for investments, payroll, or even a latte, makes it the most sought after lending product. I like to see breadth to a business’s financial and credit resources, so I prefer to compliment the lines with credit cards, trade credit and vehicle and equipment leases (and yes, you can get just about any car on a business only lease).
I know investors that will leverage lines of credit to secure a property and use trade credit with Home Depot for materials - enabling them to flip properties without ever walking into a bank. I’ve also seen the other side of this. I spent time trying to help a successful agent get financing so they could take on a huge opportunity with a builder. Unfortunately, I was too late to the scene. By the time I arrived, years of running their business and investments on their personal credit had taken its toll. Despite $800,000/yr in commissions they couldn’t get $10,000 in credit. Don’t postpone taking action, because when it is too late - it’s too late!
In my next post, I’ll focus on the actions you ned to take to best position your business for obtaining financing.
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Very well said , many times it is way too late and the damage is done.
I would like to point to personal experience . When you starting realize your business idea , many times the first money coming from source known as “family,friends & fools” . Instead to “sink” it straight to the startup , I suggest to use it to “perfect” you FICO score and then start the steps as written above .
I did it “backwords” and it took 6 years to get out of that “vicious” circle .
Very educating post , thanks…TZ