The big question is does business credit matter when investing in commercial real estate.
Let’s talk about credit
When you started your business, you likely were able to operate out of your own home, or even a small office, but now, your needs have changed and you need more space. Or, you already own a real estate portfolio and you are expanding. It is time to purchase some commercial real estate; but how?
Commercial real estate is a large purchase that will likely need an outside investment to help facilitate the purchase. As an owner, there are many routes you can take when purchasing a new property. The most common way to fund your commercial real estate investment is by using a loan.
There are multiple types of business loans available to help businesses invest in real estate. The most common loans used are SBA 504 loans, regular business loans (or term loans), or by using a bridge loan. Each type of loan has a different set of requirements set by the lender to qualify for funding.
There are multiple factors that will impact your ability to get a loan, as well as your loan terms and conditions. One thing that lenders will be looking at is your credit, but what is more important? Your business credit? Or your personal credit? Keep reading to find out!
First, what is the difference between business credit and personal credit?
This is a question that many people, even business owners, have to ask themselves.. Business credit is used by lenders, vendors, or anyone else in the business sphere. A business’s credit score will indicate if they have been financially responsible in the past.
This probably sounds extremely similar to personal credit, and it is. Business credit and personal credit essentially do the same thing: provide a snapshot of your financial history and situation to lenders.
Business credit and personal credit will differ in a few ways. Unlike with personal credit, you must take a few steps to establish business credit. You will need to register your business as an LLC or corporation, request an employee identification number (EIN) from the IRS, and open a business checking account to start building business credit.
Another difference between business credit and personal credit is the way in which your score is calculated. With personal credit, most institutions will follow your FICO score to determine your creditworthiness, but with business credit, there is no standard scoring model used.
What does business credit impact?
A business owner will have certain expenses that will not be able to be paid for out of pocket. Many expenses will need a loan, a line of credit, or some other form of financing to help make the purchase. A business’s credit will directly impact its ability to receive this outside assistance.
A company that has a high credit score will have better approval odds when applying for outside funds. Also, a higher business credit score can help businesses land loans that have more flexible terms and better rates.
Businesses that have a healthy credit profile will also unlock more opportunities to work with higher profile vendors and they may even save money on things like business insurance. Having a strong credit history will ultimately save businesses money across multiple different fronts.
So, does business credit matter when investing in commercial real estate?
To be short, yes. Business credit matters when purchasing a commercial property, but let’s take a look at why.
As mentioned, investing in commercial real estate is a costly venture. Most owners take on debt to buy commercial real estate. Luckily, there are many options available to help offset the costs of investing in commercial real estate.
Businesses that have strong credit backgrounds will have an easier time qualifying for safer financing options. When purchasing commercial real estate, a government-backed SBA loan is the safest option but has the strictest lendee requirements. SBA loans boast the lowest interest rates. But the SBA will look into almost every aspect of your business before giving you a loan. If your business has a poor credit history, it can instantly disqualify you from an SBA loan.
Other lenders will look into your business’s credit history as well, but they may be a bit more lenient than the SBA if your credit score is low. These other lenders will offer similar loan options as the SBA, as well as more financing options such as business lines of credit, or short-term loans. These financing options are more friendly to businesses with a weaker credit history, but come with higher interest rates, and may even need a personal guarantee from the borrower.
Ultimately, having a strong business credit profile will open more opportunities to safer financing options, making it safer to invest in commercial real estate.
How to start building business credit
So with business credit being important to many areas of your business, you may be wondering how to improve your credit score. Similarly to personal credit, building your business credit profile will take some time and effort.
A few ways to improve your business credit rating are:
- Dispute any incorrect credit hits on your account.
The three most important business credit bureaus are Duns & Bradstreet, Experian, and Equifax. Each has ways for business owners to dispute any incorrect information that may be on their credit profile.
- Pay any past due balances and make sure to keep up with future payments.
The easiest way to lower your credit score is to miss a payment. If you do miss a payment, make sure to resolve it as quickly as possible. Keeping up with future payments, or even paying more than is required of you, can help repair a low credit score.
- Keep personal and business finances separate.
It’s hard to build business credit if you use your personal credit card to make business purchases. If something is for the business, use a business card, or line of credit to make the purchase.
- Work with lenders who report to credit bureaus.
Not every lender or vendor will report to a credit bureau. This means that even if you are making payments on time, it is not always positively impacting your credit score. When working with a commercial lender, or vendor, make sure that they report to a credit bureau.
As you start to build your credit score, remember that change will take time. A few months of on-time payments will not instantly raise your score. If you want to learn more about how you can improve your business’s credit health, check with the credit bureaus. Each of the major credit bureaus offers subscription-based services that help businesses better understand their credit profile.
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In summary, commercial real estate is a costly venture. However, businesses that have a strong financial background, including a high credit score, will easily be able to access different financing options to offset the high costs. Using your business credit to secure a loan or another form of financing will help keep your business running smoothly, even when making a large purchase.
If you are worried about taking on more debt, read through our Keys to Debt Management guide to ease any concerns you may have.