Buying a real estate property is a pretty expensive venture, and not a lot of people can do it without a loan. The traditional way is using a conventional mortgage loan. Most of the time, to secure financing, people use their personal credit. But that’s not the only option, as you can also utilize your business credit for such a cause.
With a good profile, business credits can even get you financing for a house. So, it’s becoming a very popular strategy among people who are interested in investing in real estate. But how to use business credit to buy real estate?
We are all about empowering you with the right knowledge about the different ways you can use business credit in real estate investment. Keep reading till the end for the benefits and risks of this process.
What Is Business Credit?
Business credit is like a financial track record for your company. It's the history that lenders and partners look at to determine if they want to do business with you or lend you money. Just as individuals have personal credit scores, businesses have their own separate credit ratings.
Let's say you want to buy an investment property using your business rather than your personal finances. So, you would need good business credit in order for banks and lenders to trust you with a loan.
A number of organizations calculate the strength of your business credit, and they will consider factors such as
- On-time loan payment capability
- Any risk related to lending the money
- How likely it is that your venture will succeed
Maintaining strong business credit has its perks. It offers investors alternative financing options. At the same time, they can protect their personal credit from any setbacks that might come up in the real estate deals.
One crucial thing to remember: Building a solid foundation for your business through proper financial management starts from day one. Keeping an eye on all sides of your accounting will be helpful for continued growth!
How To Use Business Credit To Buy Real Estate
With a strong business credit, you can get the money you need for your real estate investments. And the right use of that funding may later result in high returns. If you are thinking how to buy property with business credit, here are a few choices for you:
SBA Loans
The Small Business Administration (SBA), a government agency dedicated to helping entrepreneurs, offers various financing programs that can be utilized for real estate investments.
There are two popular types of SBA loans:
- 504 loans: The 504 loan gives long-term fixed-rate financing for major assets. We are talking about purchasing or improving real estate properties.
- 7(a) loans: On the other hand, the more flexible 7(a) loan offers short and long-term options with variable or fixed interest rates.
SBA loans are highly regarded in the world of small business financing. That’s because the interest rate is lower compared to commercial real estate loans. Also, they often come with higher borrowing limits and longer repayment terms.
However, you should note that these loans are generally only available for owner-occupied transactions. It will not be like rental or investment properties; you have to use the space yourself.
Business Lines of Credit
You can also think of taking out a general business line of credit from online lenders or traditional banks. It’s a flexible source of funding for buying a property.
The system is similar to a credit card. You will have access to a certain amount of credit that you can use, pay down the balance, and then repeat the process. However, whether you qualify for a business line of credit or not typically depends on two important things.
1. Your company's annual revenue
2. Your business credit profile
Remember that some lenders may want you to sign a personal guarantee before making their lending decision. In such cases, you need to maintain both good personal and business credit scores.
The interest rates can range anywhere between 8% -35%. But they vary based on your credit and business information, which means your financial standing.
But you also need to understand its limitations. It may not cover the costs associated with a standard mortgage that lasts several decades.
Additionally, the lenders have the authority to review your accounts at any point in time. If they detect changes in risk levels linked with an account holder or their business, the lender can decide whether or not to finance more transactions with those funds.
Commercial Real Estate Loans
When it comes to buying commercial properties with business credit, commercial real estate loans are another possible option. They function almost similarly to traditional mortgages. But designed explicitly for investing in properties with five or more units. For instance, retail spaces, office buildings, apartment complexes, etc.
You can get these conventional mortgages from banks or financial institutions. However, these loans also come with some unique terms and conditions-
- Commercial real estate loans typically entail higher interest rates compared to consumer mortgage rates.
- Repayment terms tend to be shorter, while down payments might be higher than what you would expect for residential purchases.
- Lenders generally require very good credit standing when assessing applicants for such financing options.
Credit Cards
Believe it or not, some real estate investors choose to buy properties using credit cards. For house flippers and short-term financing needs, in particular, credit cards may seem appealing for a few reasons.
- Credit cards provide immediate access to funds. You don't have to wait 30-60 days like other forms of financing.
- If you have a rewards credit card, each qualifying purchase could earn you points, miles, or cash-back bonuses. These rewards won't help pay off the high-interest fees on your balance. Also, cash loans don't usually earn rewards. Still, if you pay for renovation materials or the fees for contractors with the card, that may get you rewards.
The best thing about getting a business credit card is that if you use it wisely, it might help you build your business credit. And, if you want to get good rates and terms on business loans in the future, you need to have good business credit.
However, just because you can do something doesn't mean it's always the best option. Using a credit card, whether personal or business, involves certain risks when buying investment properties.
The Benefits Of Buying Property With Business Credit
Real estate investment using business credits is beneficial in most cases. It comes with opportunities of no personal guarantee, better rates of interest, and diversified financial arrangements. Let’s discuss more.
No Use of Personal Credit Score
One major perk is that you don't really have to rely on your personal credit score. It means that if things go south, your personal assets and creditworthiness will remain protected.
Let's say there are financial difficulties with the property, or you're struggling to make payments. With a business credit approach, there's no need for a personal guarantee tied to the loan. Even if the investment doesn't pan out as expected, it won't impact your personal finances in any significant way.
Potentially Better Interest Rates
If your personal credit score isn't stellar, opting for business credit can be a smart move. That’s because low personal credit means high interest rates, whereas, with a strong business profile, you can obtain potentially lower rates.
For instance, let's say your personal credit history has some dents in it because of past financial challenges. Using your strong and established business credits can help you secure a real estate loan at more favorable terms. Lower interest rates mean savings in the long run!
Access to Diversified Financial Products
Having a solid business credit score opens up doors to a wider range of financing options for real estate investments. In other words, you can look into more complex deals and different kinds of properties.
For example, if you have good business credit, you can use lines of credit or even business credit cards as alternative ways to get the money you need to buy or fix up properties. It's all about expanding your financial toolkit!
Risk Factors Of Buying Real Estate With Business Credit
Apart from all the positive impacts of business credit in buying property, you also should be aware of the risks you will be taking. It’s an investment, so of course, there will be risks involved.
- One major risk is the high interest rates associated with credit cards. If you carry a balance on your card, imagine the interest piling up on a property that costs $20,000 or $30,000!
- The investment will definitely have an impact on your credit score. Even if you make timely payments for your property purchase with business credit, there’s still a possibility that it could negatively affect your personal and business credit scores.
- It might be a surprise, but some card issuers might not even allow using their cards for buying commercial or rental properties. So, be sure to check your cardholder agreement beforehand.
- Credit limits don't always match the full cost of buying a house. There are also cash advance choices on credit cards that can help you buy a house, but keep in mind that you may have to pay big fees of 3–5%. Imagine having to pay those fees on top of your normal interest rates. It could turn into a financial disaster pretty quickly.
Conclusion
It’s a brave and bold decision to go with business credit for investing in a real estate property. This approach can help you discover the diverse ways you can use business credit and protect your personal credit at the same time.
SBA loans or credit cards, even business lines of credit, and commercial real estate loans are all preferable options. As much as the process brings advantages, always remember that there are risks, and you need to consider them all. Be careful about using credit cards and potentially higher rates of interest. Check all your options before diving headfirst!
Here in Minnetonka, Excelsior Realty has been a trusted partner for many regarding real estate deals. Do you want to use your business credit and buy a property? We are here to help you with complex details and make sure you are on the right track with the investment. Call us today and see how we can help!
