Real estate investment is one of the most lucrative means of amassing wealth; however, it requires significant initial capital in most cases. It is for this reason that many people use business credit to finance a real estate transaction. This allows them to gain access to money while preserving personal assets. In the same way, with business credit, you will also be able to grow your real estate portfolio strategically and multiply returns, along with reducing financial risks.
How to Understand the Basics of Business Credit
First of all, it’s important to understand what business credit is and how it works before diving into the ways in which it would be used in real estate investing. Actually, business credit is the ability of a company to borrow money to purchase goods or services based on trust that payment will be made in the future. Unlike personal credit, business credit is associated with your company’s financial history, and it plays a huge role in getting financing without a personal guarantee.
Building strong business credit opens ways for your company to more considerable credit limits, better interest rates, and favorable conditions. This becomes pretty important in real estate, where large sums of money are very often required as down payments, renovations, and other expenses.
How to Build Business Credit for Real Estate
The very first step in building business credit is to structure your business into a completely separate legal entity apart from you via an LLC or corporation. This separation is important in that it protects your personal assets from liability, while also establishing your business as a separate entity that has the capability to build its own credit profile.
- OBTAIN AN EMPLOYER IDENTIFICATION NUMBER (EIN)
Each business needs to have an EIN assigned to it-the Social Security number of your business. This number will be used while paying your taxes, opening business bank accounts, and applying for business credit.
It’s very important to have your business finances separate from your personal finances. Open a business bank account for all income and expenses concerning your real estate activities. This will also be a base to help in proving financial stability in relation to the application for credit.
- APPLY FOR BUSINESS CREDIT CARDS
Business credit cards are a good avenue through which you can build credit. You can pay with these for business expenses that you may have regarding real estate, such as travel, marketing, or minor renovations. Make sure you pay your balance on time each month so you can start building a good credit history.
Work with vendors that report payments to business credit bureaus. Regular transactions with these vendors and on-time payments will go toward building your business credit score. This becomes very valuable if you deal with suppliers of materials in property renovations.
How to Leverage Business Credit for Real Estate Investments
If this business has built up any credit, then you will have various means of accessing that credit to fund your real estate transaction. Here’s how:
- USE BUSINESS CREDIT TO SECURE LOAN
This is one of the direct manners in which you will be able to apply your business credit-to secure business loans. Lenders are most likely to give businesses with good credit histories favorable terms. Use these loans to purchase properties, finance renovations, or cover other investment-related expenses.
- APPLY FOR A BUSINESS LINE OF CREDIT
For this reason, real estate investors have very little extra capital on hand to cushion against uncertainty. Having a business line of credit allows flexibility and has become a no-brainer for many real estate investors. With a business line of credit, one can borrow up to a predetermined amount and pay interest only on the amount utilized. This can be very helpful for paying for unexpected expenses or financing improvements in property without diminishing one’s cash balance.
- BETTER TERMS WITH LENDERS
Stronger business credits will also put you in a position to negotiate better terms with mortgage and real estate loans. The better interest rates, reduced down payments, and longer repayment periods will mean a much better cash flow position and overall return on investment.
Good business credit can also make your business a more attractive partner to other investors. You can utilize credit to get into joint ventures in which you provide the credit and the partner provides the capital or the expertise. This might also open the doors to bigger or higher value real estate deals.
Risks and Considerations
While there are many reasons to love leveraging business credit for real estate investments, it’s essential to be cautious in such moves. Here are some risks associated with this approach, besides one or two things to consider:
- OVER LEVERAGING
It is risky to undertake too much debt, especially if those investments in real estate do not pan out as expected. It’s a good idea to make sure your business has a good plan in terms of managing debt, and doesn’t overborrow beyond your business’s capacity.
- CREDIT SCORE IMPACT
Similar to personal credit, there will be negative impacts to your business credit score from missed payments or consistently high balances, which may make it tougher to secure financing in the future.
- MARKET FLUCTUATIONS
Real estate markets can be volatile. Contingency plans should be in place in case of market fluctuation and your investment does not yield as much in returns as anticipated. One of the possible ways to minimize such risks would be through diversification and the maintenance of liquidity.
- LEGAL AND TAX IMPLICATIONS
Real estate transactions involve many complex legal and tax considerations. It is best to consult with a lawyer and a tax advisor to understand the implications that come with using business credit in your investments and ensure that all regulations are complied with.
Conclusion
Investing in real estate using business credit is one good approach toward building wealth by maximizing return while offering protection from risks to personal assets. Setting up good business credits opens you up to a world of better finances, negotiating favorable terms, and lowering reliance on personal credit.Â
This can be an effective strategy, but it is one you will have to go into with a lot of planning and consideration for the associated risks. After all, business credit can become one of the most critical tools in your real estate investment tool belt.
