What is Business Credit for Property Investors?
Business credit refers to a company’s financial history and its ability to borrow money, as reflected in the business credit report. The primary business credit bureaus produce business credit scores to help creditors determine an enterprise’s creditworthiness. Your business must have a well-established credit history that is separate from your personal credit. Business credit measures a company’s ability to borrow and repay money.
Property investors often utilize this credit to purchase real estate or finance other activities, such as renovations and marketing expenses. Unlike personal credit, business credit is tied to the company, not the individual. Business credit reflects a business’s financial stability.
Establishing strong business credit typically enables investors to access higher credit limits and more favorable payment terms. While many property investors rely on personal credit for real estate investments, business credit can provide more favorable borrowing conditions.
This can open up opportunities for investors to expand their ventures and undertake larger projects. It also provides a layer of protection for personal assets, separating business finances from personal funds.
For additional details or guidance on building business credit or financing real estate investments, be sure to seek comprehensive information to support better decision-making.
How can Property Investors Establish and Build Business Credit?
Real estate investors should follow specific steps to establish and build business credit. Many of these activities will also lend legitimacy to your real estate investing business.
Form a Business Entity: The first step in establishing business credit is to create a formal business entity, such as an LLC, S corporation, or C corporation. As the business owner, you can also operate as a sole proprietor or in a partnership, but in most cases, you will need to request the creation of a business credit profile. Business owners face fewer hurdles when acquiring property through a corporation or LLC compared to a sole proprietorship.
You’ll typically file the paperwork to form your business entity with the Office of the Secretary of State or a similar government office in your state.
When establishing your business entity, it’s also a good idea to create these information points, as the credit bureaus typically look for them:
- Business Name (usually required for formation as well)
- Business address
- Business phone number
- Business email
- Website & social media profiles
Establishing these identifiers also lends credibility to your business when working with lenders, property management companies, developers and contractors, banks, vendors, and other investors or investment groups.
Get an EIN: An Employer Identification Number (EIN) helps further establish your business. Most business credit bureaus use your EIN to track your business’s credit activity. An EIN can also facilitate other business activities, such as opening a business bank account, obtaining business credit cards, and establishing trade credit accounts. You can get an EIN if you don’t have employees or opt for a Federal Tax ID Number instead.
Open a Business Bank Account: Establishing a checking account in your business’s name isn’t strictly required for business credit, but it can help significantly. A business bank account keeps your personal and business finances separate. This enables you to track and report business income and expenses more efficiently, and allows business credit bureaus to track credit activity more effectively.
Open & Use Business Credit Cards: One of the benefits of establishing a separate business entity for your property investment activity is access to business credit cards. Many cards have higher credit limits and more perks and rewards than personal credit cards. Using and paying off your business credit card helps establish and build your credit history. Higher credit limits improve your credit utilization ratio.
Open Business Tradelines: Opening a business trade line or trade credit can further build your credit history. However, it’s essential to work with vendors that report to the major business credit bureaus (Dun & Bradstreet, Experian, and Equifax). Some popular vendors include:
- Quill
- Grainger
- Uline
- Summa Office Supplies
- Crown Office Supplies
Get a DUNS Number: A DUNS number is a unique nine-digit identifier for businesses, essential for establishing business credit and credibility with lenders and suppliers. Property investors can apply for one through Dun & Bradstreet’s website.
Use Credit Responsibly: Many of the activities to build good personal credit also apply to building good business credit. The two most important actions are consistently making payments on time and keeping your credit card balances low. It’s also a good idea to maintain a diverse credit mix and keep accounts open and in good standing, allowing them to age, or “season,” which further builds your credit history.
Monitor Your Business Credit: Finally, regularly review your business credit reports to ensure everything is accurate. Look for and remove any false or incorrect information, and ensure that your credit account holders report your activity accurately.
What types of Real Estate can you Buy with Business Credit?
Property investors can utilize business credit to acquire various residential properties that offer steady rental income and potential long-term appreciation. Additionally, meeting eligibility criteria—such as maintaining a strong credit history, providing proper financial documentation, and having an appropriate business structure—is essential for qualifying to use business credit for real estate purchases.
Examples include:
- Single-family homes
- Multifamily homes
- Fix-and-flip properties
- Vacation rentals
- Land for development
- Condos
- Apartments and other rental properties
Investment property loans are frequently used to finance the acquisition of these types of properties when leveraging business credit.
Commercial Real Estate
Property investors can also utilize business credit to purchase commercial real estate, including office buildings, retail spaces, and warehouses. These properties often generate higher rental yields compared to residential properties. Using business credit to purchase commercial real estate enables investors to access a broader range of investment opportunities and potentially achieve higher returns compared to residential properties.
What Business Loans allow you to Buy Real Estate?
Establishing business credit provides access to various commercial loan options, as well as a wide range of credit products available for business financing. Lenders will review a business’s financial statements to assess its ability to support a mortgage. Business credit can open doors to better financing rates and larger loan amounts.
Having a strong business credit score can appeal more to sellers, increasing chances in competitive markets. Consulting with legal and tax experts is advisable when considering business credit for real estate transactions.
Here are a few types of business financing that can help investors build their business portfolios.
Hard Money Business Loans: Hard money business loans are a type of financing often used by real estate investors for property investments. These loans are typically secured by the value of the property being purchased, rather than the borrower’s creditworthiness. Hard money loans are renowned for their swift approval process and flexibility, making them a popular choice among investors seeking to acquire real estate quickly and efficiently.
Business Line of Credit: A business line of credit is a flexible financing option for real estate investments. Business lines of credit enable business owners to borrow funds up to a specified credit limit and repay them as needed. This type of financing can be used for various real estate transactions, such as purchasing properties, renovating them, or covering unexpected expenses. With a business line of credit, investors can capitalize on opportunities quickly and efficiently in the real estate market.
Business Credit Cards: Business credit cards can be a convenient way to finance real estate investments, providing quick access to funds for property purchases or renovations. Many business credit cards also offer rewards or cashback on purchases, allowing investors to earn additional benefits while growing their real estate portfolio. However, it’s essential to carefully manage credit card debt and interest rates to maximize the benefits of using business credit cards for real estate investments.
SBA Loans: Property investors often turn to SBA loans to finance commercial real estate acquisitions, as these loans are not typically used to purchase residential properties. SBA loans can provide property investors with the necessary funding to expand their commercial real estate portfolio and grow their business. By leveraging an SBA loan, investors can take advantage of favorable terms and rates to maximize their return on investment in the commercial real estate market. The Small Business Administration offers programs like SBA 504 and SBA 7(a) loans, which provide benefits such as lower down payments and longer terms for commercial real estate purchases. Qualifying for an SBA loan involves a thorough process taking approximately 60-90 days.
Commercial Real Estate Loans: Commercial real estate (CRE) loans are a popular choice for investors looking to finance the purchase of real estate properties. These loans are specifically designed for investors seeking to acquire income-generating properties, such as office buildings, retail spaces, or apartment complexes. CRE loans typically offer competitive interest rates and terms tailored to the needs of real estate investors.
Investors should also consider exploring other financing options, such as alternative business loans and credit lines, to find the most suitable financial product for their unique needs.
It’s essential to note that financing for investment properties typically involves stricter requirements, including higher credit scores, larger down payments, and additional documentation, compared to traditional home loans.
What are the benefits of Buying Real Estate with Business Credit?
Using business credit to purchase real estate offers several advantages. Firstly, it allows businesses to separate personal and business finances, enhancing financial organization. This separation is crucial for maintaining clear records and simplifying tax filings.
Moreover, leveraging business credit for real estate acquisitions can significantly boost a company’s purchasing power. By accessing additional funds through credit lines or loans, businesses can rapidly expand their property portfolios and diversify their investments.
Another key benefit is the ability to mitigate risks associated with real estate investments. Property investment companies can utilize business credit to protect personal assets in the event of loan defaults or unforeseen circumstances, thereby safeguarding the owner’s financial stability.
Utilizing business credit for real estate transactions enables companies to establish a strong credit history. This can lead to improved credit scores, lower interest rates on future loans, and better terms from lenders, creating opportunities for achieving long-term financial goals. Additionally, showing consistent profit in your business’s financial statements, such as profit and loss (P&L) statements, can further enhance your eligibility for favorable business credit and financing options.
What are the drawbacks of Buying Real Estate with Business Credit?
One key risk is the potential for high interest rates associated with business loans, which can lead to increased costs over time. These rates can significantly impact the overall profitability of real estate investments.
Another pitfall is the potential for accumulating substantial debt when relying on business credit for real estate transactions. This debt burden can strain a company’s financial health and limit its ability to pursue other investment opportunities or cover operational expenses.
Moreover, defaulting on business credit obligations related to real estate investments can have severe consequences. Defaulting may damage a company’s credit score, making it more difficult to secure future financing on favorable terms. It can also lead to legal actions such as foreclosure, putting the invested real estate assets at risk. Additionally, if business assets are used as collateral for real estate loans, those business assets may be at risk of loss if the business defaults on its obligations.
Buying Real Estate with Business Credit Pros & Cons
Pros:
- Ability to leverage business credit for real estate investments.
- Separation of personal and business finances.
- Potential tax benefits for business-owned properties.
Cons:
- Higher interest rates and fees associated with business credit.
- Limited availability of business credit compared to personal credit.
- Risk of damaging business credit if real estate investment fails.
How do Property Investors apply for a Business Loan to Purchase Real Estate?
Follow these steps to apply for a business loan to purchase an investment property.
Step 1 – Determine the Type of Loan Needed: Property investors should first assess their financial needs and the type of loan that best suits their real estate purchase. Options could include traditional mortgages, commercial loans, or hard money loans.
Step 2 – Prepare Financial Documentation: Gather all necessary financial documents, including business and personal tax returns, bank statements, proof of income, and information on existing assets and debts. Lenders will require this information to evaluate the borrower’s financial situation, including personal income, business cash flow, and financial stability, especially for home loan applications, as well as creditworthiness.
Step 3 – Research Lenders: Shop around and compare loan terms, interest rates, and fees from different lenders. Consider both traditional banks and alternative lenders to find the best financing option for the real estate investment.
Step 4 – Submit Loan Application: Complete the loan application with the chosen lender. Be prepared to provide detailed information about the property being purchased, the investor’s financial history, the amount to be financed, the intended use of funds, and the intended use of the loan.
Step 5 – Undergo Loan Approval Process: After applying, the lender will review the borrower’s financial information and conduct a credit check. They may also require a property appraisal to determine its value. The lender will assess the borrower’s ability to meet the repayment terms as are necessary for the home loan. The investor will then receive approval or denial for the loan.
Step 6 – Close the Loan: If approved, the investor will need to review and sign the loan documents. They will also need to pay any closing costs and fees associated with the loan. As part of the home loan process, a lump sum down payment is typically paid at closing. Once everything is finalized, the funds will be disbursed for the real estate purchase. Real estate investments usually have monthly payments.
Frequently Asked Questions
Here are the most frequently asked questions about utilizing business credit to purchase real estate.
Can I purchase my own residence using Business Credit?
Typically, business credit is not intended for personal expenses, such as purchasing your primary residence. It is primarily used for investment properties or real estate transactions related to your business activities. However, many individuals aspire to use financial strategies to acquire their dream home, making the pursuit of homeownership a significant life achievement.
While technically possible, mixing personal and business finances for residential property purchases can blur the lines between them, leading to complications in accounting and financial management. Mixing personal and business finances can also have legal and tax implications.
Business owners have different mortgage loan options, including conventional loans and FHA loans. Conventional loans typically require a good personal credit score and a steady income for business owners. The government backs FHA loans, which are suitable for borrowers with lower credit scores or smaller down payments. Many banks and lenders offering these products are Member FDIC, providing additional security for deposit products.
Conventional loans typically require a down payment of at least 5% and a minimum credit score of 620. Personal credit scores are more critical for mortgage lenders when considering home purchases than business credit scores. Self-employed individuals may use stated income loans for mortgages, which rely on bank statements rather than conventional income proof.
How much do Business Loans for Property Investment Cost?
When considering business loans for property investments, it’s essential to understand the associated costs. These costs can vary depending on factors such as the loan amount, interest rate, loan term, and the lender’s fees. Typically, interest rates for business loans for property investments can range from 4% to 15%, depending on the lender and the borrower’s creditworthiness.
Additionally, lenders may charge origination fees, closing costs, and other fees that can add to the overall cost of the loan. Borrowers should carefully review all costs associated with the loan before committing to ensure they understand the total financial commitment required to finance their property investment.
Is it better to use Business or Personal Credit for Real Estate Investments?
When considering real estate investments, using business credit offers distinct advantages. With business credit, your personal credit score remains unaffected, and you typically have some limited liability protections that keep your personal assets safe. Business credit also allows investors to access higher borrowing amounts.
On the other hand, obtaining commercial financing for investment properties may be more challenging. Some lenders prefer to lend to individuals rather than businesses for home purchases because it’s perceived as a less risky scenario. Mortgage lenders focus more on managing personal credit and income for residential purchases.
Many business loan lenders don’t issue funds for property investment. For example, you can’t purchase residential properties with SBA loans, and most banks or alternative lenders don’t issue business-term loans for this purpose either. Even with an established business credit history, most property investment lenders rely on your personal credit for approval.
How to Use Business Credit to Buy Real Estate – Final Thoughts
Leveraging business credit to invest in real estate can be a powerful strategy for growing wealth and expanding your business portfolio. By utilizing this financial tool wisely, you can capitalize on opportunities that may otherwise be out of reach. Remember to conduct thorough research, seek professional advice, and have a solid plan before making any investment decisions.
Contact us if you have any further questions or would like to apply for a small business loan. Our alternative funding experts can help you find the best financing options for commercial property purchases or other business needs.
