Business LOC vs Personal LOC

[Anthony Liguori]

I been looking into personal lines of credit and business lines of credit.. I have read that people use this method for 20% down payments on properties and other things such as funding for their flips and other projects etc... I was thinking about doing this and looking into different banks that offer this...usually small banks and credit unions... I have also heard the term "revolving" and "simple interest" when it comes to asking these banks if these types of LOC have it. So does anyone have any input on these types of lines of credit and which banks they suggest.. also with a business line of credit do you need a LLC.. I need the in's and out's of the two... any help?

[Michael Glist]

You will 1st want to make sure that the lender you are going to finance with is ok with that as the source of down payment. If you are looking to get conventional financing this will likely be a no go as they will require your down payment funds to be your earned funds and not a loan. 

The term revolving is typically referring to credit card stacking where you get approved for a few cards with a total combined limit of lets say $80,000 and then turn that into cash and use it for down payment. The thing to be aware of in this scenario is that maxing out your credit cards like this will definitely take a toll on your credit score so you will want to make sure you are already pre-approved with a lender and see what their policy is on credit. Some lenders will pull credit initially and that is all some will pull it a 2nd time before closing to make sure nothing has changed which is where you would potentially come into a problem with the new credit accounts as well as the lower score. 

If you get a LOC from a bank/credit union you will want to ask about the payment terms. Some will only require payment if/when you draw form the line of credit where as others will give all the funds up front and start payments.

You will also want to make sure that you take into consideration when looking at houses that you will likely 3-12 months reserves for the interest only payments (in going hard money) and you will also want to factor in payments for the LOC as well this way you know how much of the LOC you can put down and how much you will need to have set aside to make payments while fixing up the property (assuming it is a flip).

Again this is assuming you are using a Hard Money Loan or private financing as this would not work with traditional financing. If you are going towards traditional financing I would contact a local mortgage lender to discuss their guidelines. 

Yes would would need an LLC (or business entity) as well as an EIN to apply for a business LOC in most cases. I have seen it be done if the business is acting as a sole proprietorship but they did have a track record and was not a new business.

I hope this helps.