The First Thing

Hello! David J here again bringing you more of the steps on my journey toward financial independence.

First off, apologies for the extended absence. "Life happens", and lately there's been a lot happening, including the background work and research which made this post possible.

Since you're reading this post, I'm assuming you've read the previous post, "Before The First Thing". If you haven't read it yet, read that one first, then come back to this one.

O.K. You've set up your business entity structure. My recommendation is to have a structure of multiple entities as Darius Barazandeh recommends.

If you used my recomendations from the previous post on how to raise money to build your business entity structure, then you already have some experience in the business, and probably have some cash left from that experience. Getting your business entity structure established doesn't take a lot of cash, but for some of us, even the little it takes is more than we have that we can spend on anything other than food, shelter and other basics.

If you are fortunate to still be "above water", then you may be thinking that the next step is to start doing deals and start raising some cash.

Well, that would be one way to proceed, and if your needs dictate, then go ahead on to the next post in the blog (which as of the moment, I haven't written yet) and start doing your deals. Then, come back here and continue reading.

On the other hand, if you can afford to take some more time to prepare and continue building your foundation, there is still another series of steps to take to bring your businesses "to life": infuse them with some cash.

Statistically, 95% of new businesses fail in the first five years, and in some 80% of cases, this is due to lack of capital or funding. You can beat those odds by taking the time up front to allow the business to capitalize itself rather than using your personal assets and credit lines. We've all heard stories about folks who, not knowing that these strategies exist, maxed out their credit cards and mortgaged their homes up to hilt and beyond to get start up money for a business rather than allow the business to capitalize itself.

Now as I see it, there are at least two ways to do that:

1. Line up some cash investors

2. Acquire business credit.

WHAT??!! Business Credit??!! What'ya talkin' there DJ?

Well, stated plainly, I'm talking about your businesses lining up credit for themselves. Rather than use your personal savings or credit to provide the startup capital for your business entities, each one acquires its own lines of business credit.

When you established your business entities, each one was given a tax identification number, better known as an "EIN" or "Employer Identification Number". This number identifies the entity just as your own social security number identifies you. However, your business and its EIN are entirely separate from you and your social security number. So, any credit the business establishes is not reflected in your personal credit history. Of course, the reverse is also true: each business entity's credit history is entirely separate and your personal credit history does not reflect on that of your business.

That means each business entity must establish its own credit and its own credit history.

So, how do we establish credit for a business entity?

This comes in several phases.

In the first phase, we establish each entity with the business "credit bureaus".

In the world of personal credit, there are three major credit reporting agencies:

- Trans Union

- Experian

- Equifax

In the world of business credit, there are these major credit reporting agencies:

- Dun and Bradstreet

- Equifax Commercial

- Experian Business

For a business entity, you want to establish each entity with Dun and Bradstreet as well as Equifax Commercial and Experian Business.

When you register your business with Dun and Bradstreet, it gets a "DUNS" number which is the identification number used by Dun and Bradstreet to track your business's credit history. D and B then gives your business a "Paydex" score based on how well your business manages its credit history. Paydex scores range from 1 to 100, with 80 or better being considered good. The score is based on reports from a minimum of five reporting sources over the course of four consecutive months.

When you register your business with Equifax, it gets an Equifax identification number. Equifax then gives your business an "Intelliscore" credit score based on how well your business manages its credit history. Likewise, Intelliscore scores range from 1 to 100, with 80 or better being considered good. The score is based on reports from a minimum of two reporting sources over the course of four consecutive months.

In the second phase, we leverage the credit history of each business entity and begin to acquire lines of credit for each business entity.

Once your business is registered, the next step is to go out and start building some business credit in a small way. For example, establish a store account with some business supply companies. You'll see terms like "Net 30", which means the net amount owed is due within 30 days. Then use that credit to acquire the business basics, such as telephones, calculators, desks, chairs, cases of printer paper, ... whatever your business needs, without getting silly or frivolous. Remember: you're still using your own money! In-store services may be useful as well, such as having letterhead or business cards printed, getting promotional items such as pens with your company name and logo on them which you can use as "leave behinds" when meeting personally with buyers, sellers, real estate agents and the like.

Be sensible, and don't go overboard.

Once your businesses have begun to use those small store credit accounts, and have built up a bit of history - even before the full four months have elapsed - then you'll be in a position to begin approaching lenders.

Here's where we discover another reason to have multiple business entities in our structure.

See, each business can acquire its own lines of business credit. As an individual, we usually only have one Social Security Number. So, we only have one credit history. Likewise, each business has its own single credit history. However, each of us can have any number of businesses. The best part is that by keeping our personal and business credit separate, our businesses can have excellent credit, even if we don't.

Now, at the time I am writing his, I do not have access to a list of lenders who are receptive to businesses with little or no history. So, the remainder of this will be entirely based on what I have learned from others.

When your business applies for its lines of credit, you may be wondering about the income of your business. If you've been doing deals while establishing a credit history for your business, then you already have some performance history upon which to base your projections for the future. On the other hand, if you haven't closed any deals by the time you go out and apply for business credit, you can base your income projections on the expected income from deals which have not yet closed, or possibly even on your projections for what you feel is reasonably expectable for your business to be able to do for the periods being requested by the lenders. In either case, this may be referred to as either "stated" or "projected" income.

Now - all that said, there -IS- an easier way to do all of this if you can come up with some cash or credit to pay for business credit services.

Servicers exist who can help your company(-ies) establish their lines of credit.

On such servicer is Nevada Corporate Headquarters, Inc.. As their name implies, they provide services for establishing coporations and LLCs in the State of Nevada. Nevada has laws regarding LLCs and corporations which make it a very advantageous state in which to form your business entity. Again, I cannot provide any form of legal advice, so take this as my personal opinion and treat it accordingly - your mileage may differ, perhaps greatly. Discuss this with your legal and accounting professionals and work with them to develop your business credit strategy.

...or, if you want help with everything along the way, enlist such services by way of one of their affiliates, such as Tom Kish and his CashFlowExperts organization. Apologies for not having a link to his site. Google him, or view one of his weekly web "broadcasts" at Tom's TV Show. He usually does it live on Saturday mornings at 12:00 noon Eastern, 11:00am Central, 10:00am Mountain or 9:00am Pacific. Tom is based in Nevada (Las Vegas); so, he's on Mountain time.

Try as I might, I could not find a way to do all this with "no cash, no credit". The services mentioned here do have costs associated with them. There's just no getting around that. Apologies.

If you've been doing flips to raise cash, do one or two more to come up with the cash you'll need to acquire these business credit services. That may take some patience while the deal flips happen, but it will be well worth the wait in the long run.

The good news is this: for less than $5,000 you may be able to obtain access to cash lines of business credit which will allow you to grab that super-steal-of-a-deal income property without using your own credit or getting a mortgage loan in your own name. Build credit for a business entity, then use the entity's credit to buy the property in the entity's name. Then, the cash flow can go toward the debt service -AND- your "salary" (again, talk to your legal and accounting professionals about business entities and their cash flow).

Worth thinking about, eh?

We'll talk again soon!

Take care - be well!

Much Success!