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If you’re looking to build business credit for your real estate business, you’ve come to the right place.
Most real estate investors use a combination of personal mortgages, personal credit cards, and hard money loans to fund their deals.
My goal is for you to use low interest rate financing not tied to your personal credit whatsoever. You’ll be able to fund your fixing-and-flips, your rental property acquisitions, and your commercial real estate deals with business credit cards, business lines of credit, and mortgages that don’t require a personal guarantee on your assets.
1. Start with Trade Credit and Business Credit Cards
If you have no business credit to begin with, you have to get started with trade credit. Chances are that none of your suppliers offer vendor credit, but it’s worth checking out.
Vendor credit/trade credit/supplier credit means that you pay for things on terms. Usually this looks like 15 or 30 days to pay back whatever you purchased.
To build your business credit, you need payments from multiple credit accounts reporting to your business credit reports.
If you have good personal credit, use it. Make sure to get business credit cards that report to the to the business credit bureaus and not to the personal credit bureaus. Check out this article where we have a list of such cards.
Once you have around 10 business credit experiences reported to the business credit bureaus, you’re ready to start applying for business credit cards with your EIN only.
As a real estate investor, you’ll want to start with Home Depot and Lowe’s Business credit cards and business credit accounts.
The goal here is to be able to purchase supplies for your fix-and-flips or any property repairs using your business credit accounts.
Try not to overload your business credit cards with too much debt. You don’t want to use more than 50% of your credit limits. The reason why is that banks don’t like to see you using too much of your available credit.
So it’s tricky. You have to build your business credit while you’re finding capital for your deals. Play the long game here.
2. Seller Financing Is Your Best Friend
If you’re into creative real estate financing, you already know a lot about this. But surprisingly, most real estate investors don’t often buy through seller financing arrangements.
If you had an e-commerce or retail shop, trade credit/supplier financing would help you purchase needed supplies.
Seller financing is like trade credit for real estate investors.
Usually, sellers that carry a note prefer to receive some type of a down payment. So if you can use bank lines of credit to finance your down payment, you’ll have a no money down deal.
Seller financing is great because it doesn’t affect your credit. It doesn’t affect your credit utilization, your debt to income ratio, or any of that other stuff the banks like to look at.
So I highly suggest you use seller financing as often as you can arrange for it in conjunction with the other financing methods.
3. Credit Card Stacking
If you’re looking for fast cash, credit cards are the fastest and easiest way to go.
I met a real estate investor once who specialized in mobile home investing.
He had over 30 credit cards. It was how he funded his business. He showed me his massive spreadsheet where he kept track of it all.
The difference between credit cards and lines of credit has to do with flexibility. A line of credit is cash in your bank account. A credit card can always be used to swipe for purchases, but you have to pay cash advance fees if you want to pull out the cash.
And of course, the main drawback to credit cards is their sky-high interest rates.
So if you need financing in the short term, getting as many credit cards as you can is your play. Get credit cards with 0% interest intro rates. These typically last 12 to 18 months. That’s when you’d use these. But only use them as a stepping stone until you can fund your business with better types of financing.
When you apply for lots of credit cards at once, it’s called “credit card stacking”. Hard inquiries hurt your credit scores. You get one every time that you apply for a credit card.
So if you need lots of credit cards, apply for them all at the same time. That way the hard inquiries don’t land on your credit report before you’ve applied for all of them.
If each credit card gives you a $5,000-$10,000 credit limit each, then 10 credit cards will get you $50,000-$100,000 in lines of credit.
A word for the wise: business credit consultants who promise “$50,000 – $200,000 in financing within 30 days” are just going to tell you to sign up for a bunch of credit cards. Save yourself the expensive consulting fee and do it yourself!
4. Apply for Business Lines of Credit
The ultimate goal here is to pay for all of your deals with low interest bank lines of credit that require no personal guarantee on your assets.
Once you’ve built up your business credit, it’s time to start applying for business lines of credit.
I’m not talking about online lenders here. Those guys charge ridiculously high interest rates and fees.
I’m talking about traditional bank lines of credit for your business.
These have the lowest interest rates you can get on the market. You can use the money for any business-related activity. That means you can use them for down payments, outright property purchases, subcontractor fees, building supplies, and anything else you can think of.
In the beginning, you’ll have to apply for whatever they’re willing to give you. This could be $3,000, $5,000, or $8,000. You should take it, even if it’s a low amount.
Then, every six months, apply for a credit line increase. This could be 10%, 20%, or 30%. Just a small increase.
If you start with only five business lines of credit, the small, biannual increases really add up.
Don’t apply for bank lines of credit until you’ve had at least six months of on-time payments with low credit utilization for your business credit cards.
At first, if you only have five business lines of credit at $5,000 each, you’re looking at $25,000 in credit limits.
But as you apply for more and more credit lines, that total number will grow. If you have 10 business lines of credit with a $10,000 credit limit each, now you’re looking at $100,000 in available financing.
Initially, you can use these bank lines of credit to finance repair and subcontractor costs.
After a while, you’ll be able to property purchase down payments.
Your end goal should be to make the entire property acquisition with bank credit lines.
5. Commercial Real Estate
If you want to expand into commercial real estate, you’ll want to take a look at SBA loans. The SBA 7a loan program, which is the most popular program, requires that you have good business credit scores. Specifically, they look at your FICO SBSS score.
The SBA 504/CDC loan can specifically be used for real estate purchases. These have the best long-term rates. You’d do well to get this type of funding for your commercial purchases.
If you’re looking to buy apartment buildings, retail buildings, or warehouses, this is the type of loan that you want.
Wrapping It Up
When you’re just starting out, you’ll have to use your personal credit. Good personal credit is always the basis of maximizing your real estate financing options.
However, business credit opens the doors even more. A good business credit profile means high credit limits, fewer personal guarantees, and more types of available financing.
I am a Certified Lending and Credit Specialist and first gained experience fixing my own credit. My own credit scores went from the 500s to the 800s in one year. I studied economics at The George Washington University and now have my own business working with financial technology companies. I manage my own investments and live in Salt Lake County, Utah with my wife and two kids.