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Is Using Lines of Credit Right For Me?

Linda Baumgarten

If you’re looking to fix up the property you bought with a specific amount of money before the exciting selling process, why not apply for a commercial line of credit?  If you decide to, it won’t show up on your own personal account, the interest usually isn’t charged on the unused balance, and you can pay the line back at your most convenient time. Once you find a plan that has the perfect repayment plan, it will be like using a credit card except without the high rates and hefty fees!

What do I need to get started?

Coins, small plants and house symbolizing lines of credit for home improvements

Being that we are talking about “commercial” line here, any cash you’ll use is only applicable for business purposes. In order for a bank to even begin the qualification process, you’ll need to open up a Limited Liability Company (LLC), or any other kind of business entity, for the property. Once you’re qualified, you’ll most likely be all set to start spending almost immediately.

The balance can vary based on the line’s size and risk factor involved, and the financing fee is paid on the outstanding balance. Be sure to check with your bank to see if there are any additional costs such as maintenance or availability fees. Many depositories also require you to pay back all the remaining debt in a specific span of time annually. They vary by institution, so make sure to shop around for the best offer.

How do I qualify?

After setting up your equity as a small business, what else is needed before the bank accepts you? The lenders want to make sure you’re capable of paying back the loan so the level of income and assets in your account will come up, front and center. Most financial institutions want to see your profit level over the span of two years, and generally finance up to 50% of your assets.

Various financial ratios are also reviewed. They can include the debt service coverage ratio that will check to see if your income amount is enough to pay back the debt, the fixed charge coverage ratio measuring if you can pay the interest of the debt after paying back the credit, the current ratio covering your proven ability in paying back obligated funds, and other such ratios that depend on the financial institution.

Acting as a “business owner” of your property, you’ll also have an obligation to guarantee that, if you decide to start spending the secured line of credit, the personal assets will be what the lenders chase as collateral.

Secured and Unsecured

There’s a choice between two kinds of available credit: secured and unsecured. If you choose secured, the bank can use personal collateral to secure the repayment of a loan should you default on the payment, allowing the lenders to foreclose on the assets if necessary.

If you choose unsecured instead, there won’t be any collateral pledged as security by lenders. However, the protection provided is far from perfect. Most unsecured lines are guaranteed only in your name; meaning that in case of default, the bank could go far enough to sue you.

Don’t have good credit?

You need to have good credit score to qualify for all these great payment plans and more, but what if you currently have bad credit? Credit is so important, especially these days.

There are tons of methods out there that can raise a credit score. You can eliminate credit card balances, leave old debt in your report, and simple things like paying your bills on time. There are also a plethora of websites and companies out there with programs which result in rating increases like Financial Education Services (FES) and their website FesProtectionPlan.com. They offer a Protection Plan Membership that includes credit restoration that challenges credit bureaus to remove inaccurate items from your credit report, a credit attorney assigned to evaluate your case, a life lock which aides in identity protection, and several other perks. If you go to ProtectionThatPays.com, there are videos that explain their membership plan.

There is also the United Credit Education Services (UCES) at United-Credit.org. After you enroll with them, they analyze your credit reports and will send you the finished results with their mailed letters or can be downloaded and printed on a computer. You’ll then have to review the results and contact UCES with any disputes or requested modifications before approval, then the documents will be sent to the credit bureaus. Reports will be sent continuously.

You can also get a free credit report from Bankrate.com that offers systems of comparing lenders and accounts, calculators for savings and mortgages, and an advice section with a glossary.

You are never alone when it comes to finding solutions, but if you want a quicker way to get around with qualifying for a line of credit, you can always partner with someone on the deal who does have a good credit rating and the bank will use their number in consideration!

What’s another way to get a line of credit aside from asking a bank?

If you end up not qualifying, or would rather not deal with the extra work of setting up your property as a small business to apply in the first place, there are still other ways you can get yourself a line of credit!

One great example is opening up your credit at construction supply stores. These stores usually offer 6-month, 12-month and even 18-month same-as-cash purchase plans. If you plan on flipping your rehab or renting your apartment within that time period anyway, this can be an excellent way to get a loan with 0% interest! Of course, just keep in mind that by getting a line of credit from a store, you can only use the funds towards purchases in only that store brand.

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