Building solid business credit is a wise goal for any business owner — including real estate investors. Good business credit comes with a lot of perks. First and foremost, it may help you qualify for commercial loans in your company’s name (often at decent interest rates).
With many types of investment property loans, lenders check your personal credit reports and scores when you apply for financing. Good personal credit may help you to secure better terms and lower interest rates. But there’s also a higher level of individual risk involved when you put your name on the line for an investment property.
When you use business credit to buy real estate, your personal level of risk goes down. Instead of checking your consumer credit reports and scores, the lender will generally review your business credit instead.
Of course, business credit isn’t the only factor a lender considers when you fill out a commercial real estate loan application. The value of the property itself, especially with larger like apartment loans, is often more relevant. Nonetheless, your business credit can be an important piece of the puzzle.
Keeping an eye on your business credit can stop it from being a hindrance to business deals like this. Nav’s Business Loan Builder plan can help you stay on top of your business credit and get ready for your next loan application.
How to Use Business Credit to Buy Real Estate
When you take the time to establish solid business credit, you can leverage it to access money. You can invest that money wisely and, if the process goes well, use those funds to make a profit in your real estate investment business someday.
Below are three potential ways you may be able to use business credit to purchase real estate.
1. SBA Loans
You cannot use a loan from the Small Business Administration to purchase an apartment building or other types of rental property. However, certain SBA loans can be used to finance commercial real estate purchases. The SBA 504 Loan and the SBA 7a Loan are two loan programs you may want to consider if you need funding to buy commercial real estate.
The interest rates on SBA loans are hard to beat. Currently, they range from a little over 4.5% to 9.5%. But qualifying for an SBA loan can be a challenge. Lenders consider both your business credit and your personal credit when you apply.
It’s also worth noting that, if you’re in a rush to access funding, an SBA loan probably won’t be your best choice. The application process alone typically takes 60-90 days.
2. Business Lines of Credit
Another way you can leverage your business credit to help your real estate business is by taking out a general business line of credit. Business lines of credit are available from both traditional banks and online lenders.
These accounts are similar to business credit cards in several ways. Like a credit card, you can use a line of credit up to the credit limit, pay your balance down, and repeat the process as long as the account is open and in good standing. Business lines of credit can be helpful when you need to make purchases that you can’t take care of with the swipe of a credit card.
Your ability to qualify for a business line of credit is often based on your company’s income and business credit profile. Some lenders, however, opt to review your personal credit instead and may ask you to sign a personal guarantee. As a business owner, it’s in your best interest to keep both your commercial and consumer credit reports in the best shape possible. Doing so can help set you up for success regardless of a lender’s preferred application review process.
Interest rates on business lines of credit can vary widely with business lines of credit. You may qualify for an APR from 8% to 35% (sometimes lower or higher), depending on the condition of your credit. The good news is that you’ll only accrue interest charges when you make purchases on the account.
Your credit limit on a business line of credit will be based on factors like your credit and business financial information. The more profit you show and the stronger your company’s credit rating, the better. Yet lines of credit are usually smaller than mortgage loan amounts. So, if you want to use a business line of credit to cover an investment purchase, you’ll probably need to stick with properties with lower asking prices.
In general, most experts recommend not to view a business line of credit like a 30-year mortgage if you decide to finance an entire investment property with it. Instead, consider it a short-term loan (regardless of whether the lender requires you to pay it back quickly or not). With traditional business lines of credit, your lender will perform an annual review of the account. If the lender feels your risk has changed, it could close the account and convert your outstanding balance over to a term loan at any time.
3. Credit Cards
It sounds unbelievable, but some real estate investors opt to purchase an entire property using a credit card. Yet keep in mind that just because you can do something doesn’t automatically mean you should. There can be a lot of risk involved when you use a credit card — business or personal — to purchase investment properties.
Real estate investors interested in flipping a house will sometimes turn to credit cards for their (hopefully) short-term financing needs. Despite the drawbacks, there are several reasons why investors might find credit cards to be an appealing source of financing.
- Instant Funding: With a credit card, you don’t have to wait 30–60 days (or more) to access the funds you need to make your purchase.
- Credit Card Rewards: If you have a rewards credit card, you could earn extra points, miles, or cash back for qualifying purchases. Of course, credit card rewards won’t offset expensive interest fees. Also, if you use your credit card for a cash advance, you won’t earn any rewards on the transaction. You might, however, earn rewards if you use your credit card to pay for expenses like renovation materials or contractor fees (if accepted).
Perhaps best of all, if you open a business credit card and manage it well, it could help you build your business credit profile. Good business credit is essential if you want to qualify for attractive rates and terms on business loans in the future.
Risks of Financing Real Estate Investments Using Credit Cards
There are, of course, some risks associated with using a credit card to purchase real estate. Here are five reasons you should proceed with extreme caution before you decide to finance your real estate purchase with plastic.
- Interest rates are generally high. The Federal Reserve releases the average interest rate for personal credit cards once a quarter. Most recently, the average rate on credit cards that charged interest was just under 17%. Although that average rate only considers consumer credit cards, business credit card applications are approved or denied based on your personal credit history as well. The condition of your personal credit — good or bad — can have a strong influence over your APR.
- Credit limits tend to be low. Want to use a credit card to pay for your real estate purchase? You might not have enough available credit to cover the cost. Even if you have excellent credit and high earnings, credit card limits are generally a lot lower than conventional mortgage amounts and other similar lending options.
- Cash advance fees may apply. Instead of swiping your credit card or inserting its chip into a checkout terminal, you may be able to access your credit limit in cash. This process is known as a cash advance. However, the convenience of accessing your credit limit as cash generally comes at a cost. Cash advance fees commonly range from 3%–5% of the amount you withdraw. On top of those fees, you’ll still have to pay your regular interest costs as well each month you revolve an outstanding balance on your account.
- Your credit scores may suffer even if you pay on time. When your credit report shows a high balance on your credit card compared with the credit limit on the account, your credit score might take a hit. The score decrease is thanks to something known as your credit utilization ratio (aka the relationship between your balance and account limit). With consumer credit scores, high credit utilization almost always has a negative impact. But even with certain business credit scores (like the FICO SBSS Score), a highly utilized credit card could cause your scores to decline.
- The card issuer might close your account. When you open a credit card, you agree to the terms and conditions of your cardholder agreement. Buying commercial real estate with your credit card might not be something that the issuer allows. You can check your cardholder agreement to be sure.
You may decide that financing an entire property purchase on a credit card isn’t the right choice for you. Yet, even if you come to that conclusion, that doesn’t mean you should swear off business credit cards altogether. Business credit cards can be a useful tool that can make your life easier as a real estate investor.
Remember, the best business credit cards for real estate investors come with perks. You can get rewarded for everyday business expenses you need to make anyway. Best of all, a well-managed business credit card may help you to build a better business credit profile.
Real Estate Investor Benefits of Building Business Credit
Many real estate investors, especially those who want to become a landlord for the first time, rely on personal credit to finance investment properties. There’s no question that you might be able to qualify for a great deal on rental property loan by leveraging a good personal credit rating. Yet there are also benefits to building business credit as a real estate investor.
- Using business credit might reduce your personal risk exposure. Depending on whether a personal guarantee is required, you may be able to insulate your personal assets (e.g., homes, cars, savings, etc.) in the event something goes wrong. You might also be personally protected from lawsuits associated with the property, depending on how your business is set up and other factors.
- Good business credit can open the door to other financing options. Often, you may need access to additional money as a real estate investor. For example, you need to finance the purchase of appliances, repairs, or property upgrades. Good business credit can help you access the funds you need through your company’s name instead of your own. Furthermore, with business financing you might not have to attach your property as collateral (and take on another lien) to secure the funds you need.
Final Word: Using Business Credit to Buy Real Estate
Strong business credit is a valuable asset to have as a real estate investor. You can leverage it to save money on financing and open the door to more opportunities.
Not sure where to start your real estate investment journey? If you’re looking for the best way to finance your real estate investment purchase, it can help to study the methods of other successful investors. This list of the best real estate investing books is a great place to start your prep work.
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