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Real Estate Business Loans: Everything You Need to Know
August 30, 2019
Real-Estate-Business

Real Estate Business Loans: Everything You Need to Know

If you’ve decided to start your own real estate business, you know the potential profits are high. Of course, higher returns nearly always come with more risk, and the real estate market is no exception. Transactions often move at a slower pace than desired, and volatile property prices can change your financial position at a moment’s notice.

As a result, real estate business owners often leverage small business loans to deal with their unpredictable cash flows. Although you might be hesitant to take on debt, a term loan may be the boost you need to get your real estate business off the ground.

How to Secure and Use a Real Estate Business Loan:

Why Real Estate Companies Benefit from Business Loans:

Start-up costs can range between $10,000 and $150,000, depending on the type of real estate company you’re starting and its location. Some of the main expenses new business owners face include website costs, branded materials, necessary licenses, utilities, technology, and office space.

As an established business owner, you might need a loan to help bridge gaps in cash flow when projects are stalled or housing prices unexpected drop. Ongoing expenses usually include rent, employee salaries, advertising, and insurance.

If your business is already successful, you may decide to secure a loan to fund an expansion project. These types of projects can include acquiring another firm, hiring more employees, or remodeling your office.

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Real Estate Loan Options:

There are two primary financing options if you’re seeking a real estate business loan. They include:

  • SBA Loans: The U.S. Small Business Administration (SBA) provides backing on loans to incentivize banks and other lending institutions to underwrite loans to small businesses. Their options include SBA 7(a) loans, SBA 504 loans, and Disaster Assistance options.

An SBA loan can be a great option for financing your real estate business. These loans often have higher borrowing limits — the maximum amount for 7(a) loans is $5 million — and long terms. However, they can also be more difficult to obtain without a strong credit history. In addition, you’ll need to prove that you haven’t been able to qualify for traditional financing options.

It’s important to note that SBA 7(a) loans can be used to buy fixed assets or obtain working capital for your business, but not to invest in real estate projects.

  • Alternative Financing: Alternative lenders and non-SBA-backed bank loans are also good options, especially when you don’t need a lot of capital. While private loans may be easier to obtain in many cases, they also typically come with higher interest rates and more restrictive payback terms. However, there are many money lenders out there, so be sure to conduct research prior to applying!

In addition to these two common financing options, there are other ways that your real estate company can acquire working capital. For example, you can apply for a business credit card, pursue a line of credit, or ask family and friends for funds.

How to Apply for a Real Estate Business Loan

Applying for a business loan can be a lengthy process and often requires you to provide significant documentation to the lender. The basic steps you’ll need to follow are:

  1. Review Your Personal and Business Credit Scores: If your business is less than three years old, the lender will likely evaluate your personal creditworthiness. Therefore, it’s important to ensure that you meet the lender’s minimum credit requirements before applying.
  2. Determine How You’ll Use Your Loan: While this may seem like a given, you should be able to clearly articulate this information to the lender when you apply. Again, it’s crucial to make sure that you don’t plan to use your loan for a cost that is restricted by the lender.
  3. Prepare a Business Plan: The lender will use this information to help determine your ability to pay back the loan — and how quickly you can do so. It’ll also show the lender what assets you have available to use as collateral, if necessary.
  4. Review Your Application and Submit It: Once you ensure that all information on your application is correct, press submit! Then, be sure to answer any questions your lender has as they review your application.

In addition, if you’re applying for an SBA loan, consider visiting your local SBA office so they can help you navigate the application process.

Conclusion: Evaluate Your Financing Options

Before applying for a business loan, it’s a good idea to ensure that the profit you expect to make exceeds the cost of the loan. Since real estate can be unpredictable, you may want to consider running several different scenarios and evaluating the various outcomes. Although it may seem obvious, the last thing you want for your business is to take on debt that you can’t afford to pay back.

Fora Financial

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.

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Fora Financial is a working capital provider to small business owners nationwide. In addition, the Fora Financial team provides educational information to the small business community through their blog, which covers topics such as business financing, marketing, technology, and much more. If you’d like to see a topic covered on the Fora Financial blog, or want to submit a guest post, please email us at [email protected].