How to Buy Real Estate with Business Credit
Everyone wants to own a home of their home – it’s the American dream. But sadly, the American dream is out of reach for millions of Americans thanks to factors sometimes outside of their control (i.e., the economy & job market, the pandemic, etc.).
But buying a house the traditional way (using a conventional mortgage loan) isn’t the only option.
In fact, a lot of people buy homes with business credit instead of personal credit.
Wanna learn how to do the same? Here’s how.
But first, the benefits of buying a home with business rather than personal credit.
The Benefits of Buying Property with Business Credit
Buying property with business credit has its perks so if you’re thinking of making the leap, here’s what you need to know.
- No Personal Guarantee
When you buy a property with business credit, there’s no personal guarantee, which means you won’t have to worry about the loan affecting your personal credit score if something happens. But sometimes lenders might ask for a personal guarantee if your business credit history isn’t well-established. For example, when I applied for an Amazon business account, they told me not enough trade lines were reporting. So do the legwork beforehand so you don’t have to put your personal credit on the line.
- Potentially Better Interest Rates
By purchasing a property with business credit, you may be able to qualify for better rates, depending on what your personal credit score looks like. If your personal credit score isn’t the greatest, buying a property with business credit may be the best option for you.
- Qualify for Commercial Loans
As a business owner, you may be able to qualify for commercial loans once you build your business credit. For example, you can take out an SBA loan to purchase commercial property (but more on that later).
How to Buy Property with Business Credit
Buying property with business credit might sound like a far-fetched (and even illegal) idea to some, but there are thousands of people who do this every single day.
When you use business instead of personal credit to buy real estate, the risk level goes down. If you’re buying property with business credit, lenders are going to check your business credit report rather than your personal report (most of the time).
Establish Your Business Credit
Establishing your business credit is the first step in buying a property with business credit. Lenders need to know that your business can be trusted to pay back the loan. Your business credit history will tell them all they need to know to make a decision so make sure you keep your business credit in good standing once you establish a few lines of credit.
- Choose an Appropriate Business Structure.
Choosing an appropriate business structure means structuring your business as a corporation, LLC, or LLP. That’s because sole proprietorships don’t create a separate business entity. You’d still carry some of the legal liability if you were sued and you’d be personally responsible for paying back the business loan for the property. That means, debtors could go after your personal assets. That’s why this step is super important.
- Get an EIN Number.
An EIN number is an employer identification number and it helps the IRS (and other business entities) identify your business. You’ll need one if you want to get any type of business funding because lenders want to be able to verify that you’re a real business registered with the IRS. The EIN is also required to file company tax returns, apply for permits and licenses, and open a business bank account.
- Open a Business Bank Account
Speaking of business bank accounts, it’s time for you to open one of your own. If you’re a small business (which you likely are if you’re reading this), then you’ll want to choose a bank that caters to small businesses (or at least a mid-size bank that might potentially lend to you in the future). Avoid big banks like Chase and opt instead for smaller banks like PNC.
A business bank account can help you separate business expenses and personal expenses, which is important because when lenders review your bank account to make a lending decision you want to make sure things are clear as day. Otherwise, you may have trouble getting funding.
- Open up a few trade lines.
Ideally, you want to have at least 5-8 trade lines reporting to the business credit bureaus (Dun & Bradstreet, Experian Business, and Equifax Small Business).
You can establish trade lines (a Net 30 account) with companies like:
- Summa Office Supplies
- Creative Analytics
- Crown Office Supplies
Before you open accounts with these companies, take some time to make sure your business is seen as legitimate. The following steps can help you make your business appear legitimate:
- Opening a business bank account (as mentioned in Step 3)
- Getting a business license
- Making sure you have a physical or virtual business address (not a home address or P.O. box – you can get one for just $15/month)
- Get a business phone number (you can add a second line to your cell phone using an app – try GoDaddy Second Line)
- Register your business with your state (and identify a registered agent – which can be you)
- Get any necessary permits
- Get a DUNS number.
An important part of building business credit is getting a DUNS number. A DUNS number is a nine-digit number that’s unique to your business. It’s like a Social Security number (and somewhat like an EIN) because it helps identify your business specifically. Some companies will ask for it when you apply for a business line of credit or open an account.
- Consistently Monitor Your Business Credit.
Checking your business credit report regularly can help you keep an eye out for any fraudulent activity or anything that doesn’t look right. Doing this habitually allows you to fix any issues that arise before they get worse.
Types of Funding
When it comes to buying real estate with business credit, there are a few different funding options to consider.
- Business Lines of Credit
Take out a general business line of credit from online lenders and traditional banks to help fund your property purchase. Business lines of credit are like credit cards because you can use the credit up to a certain limit, pay down your balance, and then repeat the process.
Whether you qualify for a business line of credit will depend on your business credit profile and your company’s annual revenue. Some lenders might ask you to sign a personal guarantee in order to make a lending decision. That’s why you should try to keep both your business and personal credit in good shape.
Interest rates on business lines of credit can range from 8 to 35 percent (and may be higher or lower, depending on certain factors, like your credit and business information).
Before you dive headfirst into using a business line of credit, realize that they don’t always cover the cost of a 30-year mortgage.
Also, keep in mind that with this type of funding, the lender can review the account at any time and if they decide that your risk level has changed, they can close the account and convert the balance due over to a term loan at their discretion.
- SBA Loans
SBA loans can be used to purchase commercial real estate, which means you wouldn’t be able to buy an apartment building or any other kind of rental property. Purchasing commercial real estate and leasing your spaces out to business owners can be a great source of income (as long as you do your due diligence).
SBA loans come with pretty good interest rates, ranging from 4.5% to 9.5%, which you might not be able to get with a traditional mortgage (depending on your credit).
To be considered for this type of loan, your personal credit file may be pulled so make sure your business and personal credit are in tip top shape before you apply for an SBA loan.
- Credit Cards
While it’s possible to buy property with credit cards (if your limit is high enough), it’s certainly not the best way to buy property with business credit. Some investors do purchase property with credit cards, but this type of funding has its own set of drawbacks.
Risks of Buying Real Estate with Business Credit
Of course, as with any type of investment, there are going to be risks involved. And it’s better to know them upfront before you sink your money into something that might not be worth it.
For one thing, the interest rates on credit cards are extremely high so if you’re carrying a balance, imagine the interest on a property that costs $20,000 or $30,000.
You might also have to worry about taking a hit to your credit score (even if you do pay on time). The card issuer might even close your account because buying commercial property or even a rental property with your credit card might not be allowed. Check your cardholder agreement.
Also, credit limits tend to be lower than the cost to purchase a property. If you do happen to withdraw money from your credit card to buy a property, you may also have to pay a cash advance fee, which can range from 3-5%. Imagine paying that on top of regular interest charges on the balance. Could be pretty disastrous.
Buying a home or property with business credit is completely doable. It just takes a bit of maneuvering and some credit work and you could be well on your way to becoming a successful real estate investor or homeowner.