September 15, 2016

When To Start Establishing Business Credit As An LLC?

I want to start purchasing residential rental property, when should start establishing business credit? Can I form an LLC and build credit before I even buy property?

Answer

You can begin establishing business credit as soon as your LLC is created.

Your LLC establishes credit by doing things such as opening business credit cards, obtaining a Dun and Bradstreet number, and taking out loans.

The LLCs establishes GOOD credit by making timely payments on the above.

In terms of purchasing property, it is unlikely that even “good” business credit, if your LLC is small, will ever get a mortgage that is “non-recourse”.

By non-recourse, I mean a mortgage where you won’t have to personally guarantee the note.

In most situations, a lender will require that the owners/officers of the LLC personally guarantee the mortgage.

For example, I’ve worked with companies that have owned commercial real estate for 30 years and the lender still requires personal guarantees from the owners.

With large, well established LLCs (such as a public company), they can get financing without a personal guarantee of an officer.

But for a small real estate investor, the lender will almost certainly require that you guarantee the note.

Where business credit comes in handy is in establishing lines of credit with suppliers and credit cards without a personal guarantee. While a brand new LLC is unlikely to obtain credit without a personal guarantee, over time, with a good payment history to creditors that is reported to Dunn & Bradstreet, your company can establish business credit.

So yes, the sooner your business starts establishing a credit history, the sooner it will be able to obtain credit.

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