I am learning about obtaining business credit.  This is important to me because currently our action plan to keep buying properties has hit a small road block.

The original plan was to purchase a Vegas property in cash (cash is king), cash out refinance the property to get the cash back out, and buy another property.  This was to be repeated as many times as possible until the cash supply dries up.

The problem occurred with the very tight lending policies of the banks, as well as a rather new rule of most major banks allowing a person/investor only 4 conventional mortgage loans.

Other options are hard money loans, angel investors, etc. but my first and favorite way to borrow money is with the bank.

At a recent BOSS Inc U event, attorney Rod Butters introduced the concept of business credit.  I, of course, had to sign up for the program.

Step 1 is setting up your business entity.  I use a Nevada LLC set up for me by BOSS’s Michael Bowman – a sweetheart of a attorney.  He is like a labrador retriever in human form.  Cute, big, and cuddly.

It is very important that the business looks and acts like a business.  Register with the State and IRS, which will generate an EIN number – this is like a social security number, but for businesses.  You will need a physical place and local phone number for the business.  Setting up a company website helps to validate your company in the eyes of the creditors.  BOSS did all this for me too, for a very reasonable fee.  They will do my annual filings and keep me up to date and on track because I pay them a small monthly fee to do my books.

Step 2 is signing up for some credit building accounts.  One that I never heard of before is Wright Express – a fleet card service which is a good way to purchase the gas you will use as you run around doing business related errands.  Another is opening a MerchantCard that reports to the different credit bureaus so you start building up your credit history in a good way.  Your credit will be based on the business, not your personal records, and, as Martha Stewart says, that is a good thing.

Step 3 is checking up on your business credit score if you have any, as well as your personal credit score.  Some business credit will use your personal score to determine your credit strength until your business can truly stand on its own and obtain lines of credit.  You will also sign up with Dunn and Bradstreet, and check out  Experian, and Equifax to see if your company has any credit records on file.

I still have Steps 4, 5, and 6 to go, and will keep you informed as to what I have going on as I strive to build our purchasing power with untapped business credit.

The #1 response I hear that hold people back from investing is, “But I don’t have any money!”  Robert Kiyosaki says money is a tool.  Can you agree with that?  If you can, then what would you do if you needed to do a job and you didn’t have the right tools to accomplish that job?  You find a way to get it so you can do the job.  Same as money.  Find a way to get it (legally).

We all have unique situations and different styles.  Rich Dad Education has a course on “Creative Financing”.  The instructor covers a ton of ways to be able to do a real estate deal without going to the bank to borrow the down payment or take out a mortgage.  I have heard of private money lending, borrowing from friends and family, partnerships, angel investors, seller financing, and more.  I haven’t tried any of those strategies.  They make me uncomfortable because I would be dealing mano e mano or womano.

I rather use banks.  Banks are banks, not people.  I prefer using the banks’ money over and above any other method of financing because it is the cheapest way to borrow and I am accountable to the bank, not a person or group of investors.  Andy Heller also likes banks, though he also does joint ventures, to which I have yet to graduate.  Here is an audio link that he recently sent that is a year old, but still has very good info in an interview with a mortgage broker:  Michael Gross and Andy Heller

The trouble with banks today is that they are very stingy, very tight in today’s environment.  Too many loans?  High debt to income ratio?  Self employed?  NYET!  Get used to hearing the word “no”.  If you qualify and the bank is willing to let you money, TAKE IT!!  This is called using leverage, which is the most profitable way to invest because your dollars stretch farther.  Please notice I said “invest”.  Not buy stuff you want (called doodads), but buy investment stuff that will return a profit or cash flow.

Mortgage brokers act on your behalf and go find the products and the banks that will lend you money.  Our very first home loan was through a mortgage broker.  You will hear of financial gurus talking about your “power team”.  A mortgage broker is a must have on your power team – they are on your side, unlike a bank, who is on their own side.

Doug Andrews’ missedfortune.com was recommended for financial good knowledge.  I only had time to briefly visit, but I can already tell this is a wealth of knowledge worth learning.

Here’s another way – I haven’t tried this yet because we don’t have it set up yet – but borrowing from ones’ self – using either your retirement funds (check with your retirement specialist) or from the cash value balance of your participating whole life insurance – that might become my preferred method because you will be paying back the loan – to yourself.  That interest grows your balance and makes you richer, not the bank.  This is a strategy that takes time to build.  It is also a great strategy for grandparents to begin for their grandchildren – by the time they are young adults, they have the cash balance and paid up additional riders in place and can utilize the policy instead of traditional bank loans.  Gavin Tsuda is the man who has brought this concept to Hawaii.  I even have a page on his military speak mission strategy here:  Gavin Tsuda page.

Another reason why I like borrowing money is that it is not taxable income, but it acts like income.  You can spend it, invest it, stuff your pillows with it, and you pay $0 tax on it.  You do need to pay it back, but in small installments.  If you use it wisely and invest it in cash flow deals, the cash flow pays off the debt, slowly and surely.  At the end of the payoff period, you own the investment, free and clear, and it continues to cash flow.  You will pay taxes on your profits or cash flow, but that is good, it means you are making money work for you successfully.

Here’s a pecker in the pan (or was it fish in the pan?)  All this talk about the dollar going to zero value because of so much dollars being printed and our national debt, yadda yadda yadda.  Those yadda yaddas tell you to buy gold, buy hard assets, like real estate, or buy silver.  Okay, that would be like insurance in case the dollar does get de-valued like it did in the Weimar Republic about 100 years ago, and Zimbabwe 20 odd years ago.  Everything went skyrocketing in price with those countries’ currency, so a loaf of bread that used to cost $1, started rising to $2, $20, $100, $1000, etc.   Zimbabwe started printing out $100 trillion dollar bills!  These are pretty worthless but still legal tender there.  IF the yadda yaddas are correct, and the dollar becomes worthless, then won’t it be very easy to pay off the bank debt with some loaves of bread converted into dollars?  I dunno, just a thought.  I would be taking on as much bank debt today as possible and maybe opening up a bread factory in the future.

Back to banking.  The key to borrowing from the bank is showing them you don’t really need the money.  If you are desperate and are in dire financial straits, banks refuse your loan request.  If you have good money coming in from wages, businesses, investments, or sitting on a pile of money, banks will lend you money.  Remember, borrowed money is free from taxes.  You just have to make sure you pay the loan back on time, every time.  Borrow when you don’t need in anticipation of needing it.

Groom yourself to look good in the bank’s eyes.  Kent Clothier of MemphisInvest.com has a great little video on presenting yourself to the vice president of lending at your smaller type local bank, i.e. a credit union or community bank.  Big banks have more money but they also have more restrictions, rules, and protocol.  Kent shows how to put together a nice looking 3 ring binder – he calls it a Bank Book.  Memphis Invest likes to capture your information before you can access any product on their website.  Their videos are pretty good, but you will be subjected to a sales pitch – they are in business to sell you their company and what it has to offer.

If you own your own home and have a lot of equity in it, you are sitting on a pile of gold.  The trouble with gold is that it makes you feel rich but you can’t eat it, spend it, or use it.

We had an elderly neighbor, Mrs. F, who taught me how to grow lettuce from seeds.  She owned her house outright, and scrimped and saved and sacrificed so she could leave her house unencumbered to her grown daughter.  She succeeded.  Her frugal lifestyle resulted in a debt free asset passed on, and her grandson now lives there, rent free, care free, and free loading (IMHO).

Perhaps a better analogy would be to use lettuce seeds instead of gold representing equity in one’s own home.  In Mrs. F’s case, she was sitting on 100% equity in her home, equal to 100 lettuce seeds.  When she passed on, she passed on her house with 100 lettuce seeds to her daughter, who then allowed her son to sit on the lettuce seeds in the house.

Imagine, if you will, what would have happened had Mrs. F planted those lettuce seeds in another house, after which, those lettuce seeds produce more lettuce and seeds and then are planted in another house, and on and on.  She would have acquired other properties using her lettuce seeds instead of hoarding them.

I would have followed in her path – save, scrimp, buy house, pay off mortgage, pass it on debt free to our kids.  It is what we locals do.  That is, until I realized one day that our financial future was in big doodoo and that Uncle and I might have to work forever if we wanted to maintain our lifestyle and still pass on a legacy to our kids.

We used the equity in our home and are in the process of planting it elsewhere to grow and multiply.  In the end, we will most likely be able to pass on more than just our home debt free.  We will be able to pass on investment properties seeded with our equity, paying for themselves with tenant rents, and hopefully knowledge enough to continue growing and cultivating a strong financial foundation.  (Note to our kids:  See, there is a reason to our madness.)

First and foremost, borrow from the bank if you can.  Use the equity in whatever you have to refinance to pull out money, or get the biggest line of credit you can.  Lines of credit are great.  It costs you nothing if you don’t use it, and then if you need it, it is there.  Even if you don’t need the money now, you will if you become an investor, so get those lines established.  Using these monies to finance investments is good debt, so make sure you don’t use debt to fund your vacations, new car, or other doodads.  If you do, it becomes bad debt.

Good debt puts money in your pocket (income from rentals, dividends, higher rates of return, business income, etc.)  Bad debt takes money from you (interest paid, gas and maintenance on vehicle, recurring costs, etc.)

Business Credit – if you have more than 4 conventional home mortgages, banks don’t want to lend you any more.  Your credit score will also be affected for a while because of all those inquiries and loans that have high debt to income ratios.  One way to continue investing is to establish credit based on your business entity.  It is not a quick solution.  It will take time because your business needs to prove it is profitable and legitimate.  I am taking a program through BOSS Business Services.  I am getting a bit frustrated with the slowness of the process, but it can work, if I am willing to put in the time and effort required.

Hard money lenders are another way to borrow money.  The basic premise is that the loan will be based on the investment, not your credit worthiness.  However, I am passing on this option for now.  HIGH interest rates, usually short term, HIGH points, and even though you are not dealing with a bank, some of these hard money lenders put you through the same inspection screens with all the hoops and hurdles, and your information is not all that private as your application is broadcast to the potential lenders.  A lot of seasoned investors do use this kind of strategy.  It’s just not in my comfort zone….yet.

Soft money lending.  This is the opposite of hard money lending and I made up the term.  It has the kindest interest rates, longest term, no points, and no hoops and hurdles.  It’s called borrowing from your parents.  When you find a great deal, you’ve worked out the numbers, you have a repayment and exit strategy for the investment, and you are not able to secure traditional financing, run it by your parents.  If they can afford to, and they see value and wisdom in your deal, as well as a repayment schedule, they can act as your friendly bank.  Just be sure to treat this as a business relationship and follow up on your promises.  It would be a shame if a broken agreement resulted in a broken family relationship, so be serious, communicate well, and act honorably.

Mortgage assignments, wraps, seller financing, etc. are other tools that investors are using because of the bank tightness.  Until they loosen up, investors have to become more and more creative.  One of the hurdles of being creative is the “due on sale” clause that are included in all mortgages.  Problem or opportunity?  I have a page about it: Due on Sale Clause.

Thanks to my latest “find” – KungFuFinance.com – I learned about a company that will give you your credit score for free, without having to input a credit card.  Most other offers are “free” but only for the first 30 days, and then you start getting a charge on your credit card that you must call to cancel.

The company is called CreditKarma.com.  Great site.  You do need to put in your real information such as legal name, street address, date of birth, and the last 4 numbers of your social security number.  You also set up your user name, password, etc.  If a user name is taken, you have to choose another one, and if anything is out of whack with your user inputs, you will know and have to correct along the way.

After that, you are good to go and check out your credit score.  I found that the score they gave me was on the low side – maybe because Aunty likes to dabble with finding out best rates, getting my Hawaiian Miles credit cards, and investing to near max – or maybe they have a different system from FICO.  Regardless, it was also more than just a credit score.  If there is an area that you need to pay attention to, you will be able to pinpoint what that is and take action so your score can improve.

Spend time on that site once you are up and running.  It is full of hints and explanations.

One final Aunty note:  I have friends that have the most beautiful credit scores – 840, 820 – way up there.  I could have that kind of score too if I didn’t do much more than have 1 or 2 loans and not push the limits of our borrowing power.  Once you start to invest, your credit score will get lower – because you will be using more credit and have more inquiries from banks and institutions.  You can choose to have a beautiful credit score and protect it like a big shiny bauble, or you can choose to invest by shattering that big bauble into chunks of cash flowing nuggets.