Small Business

Small-Biz Talks: Investing In Real Estate With a Line of Credit

We interviewed Alex Babayev, founder of Aral Properties, about how his real estate company leveraged debt and used it to help his business expand.

We interviewed Alex Babayev, founder of Aral Properties, a real estate investment firm, about how he was able to successfully use small-business financing to grow his business. While small-business owners know that growth requires funding, taking on debt can be a scary prospect. We spoke to Alex about what went through his mind when he chose to take out credit to grow his company, and what the process looked like.

This interview has been condensed and edited for clarity. If you're a small-business owner interested in sharing your funding story, tweet us at @ValuePenguin.

Why did you explore debt financing?

In the real estate flipping business, there's a lot of different components: You have to pay the contractors weekly, (and) you're constantly buying materials for the projects. In order to assist with all of that, I started with, first, taking basic advantage of the promotions that stores have. Like Home Depot or Lowe's. They offer, sometimes, six months no interest, 12 months no interest… that's one aspect of it. Then, as my business grew, I started reaching out to banks and telling them about my business and showing them what I've done, and that's how I got introduced to the business lines of credit. The business lines of credit were very helpful, because you only pay interest on the amount of money you withdraw.

Is there a specific reason why you were directed to a line of credit and not another form of financing? Why not a term loan or a commercial real estate loan?

From my experience, you don't need to go through such a lengthy application process for a small $50,000 line of credit. For the other loans that you mentioned, you're required heavily to go through all the underwriting guidelines and provide multiple years of tax returns, and things like that. Initially, I didn't have all that information available and ready to go.

This line of credit is coming from a local bank?

Yes. It's very difficult to go with the top big banks because of their application requirements. Even though you could be profitable, they still want to see things like a minimum age of business. So I started off with a $50,000 line of credit, and it's now been increased to $200,000.

How were you getting in touch with banks and lenders?

I would go to local banks and try to find the right people to speak to about financing my business either via phone or email, initially. I'd give them a background about my business and why I'm looking for funding. That's how I had success. It's probably the best way to do this because people will either tell you they're willing to work with you or not right away. Those who were interested would then want to set up face-to-face meetings to discuss logistics. So I didn't just apply for loans; I would first make the connection with a human being at the bank who was in that department.

Have you ever had any trouble repaying your line of credit?

No, I have not. I've always managed and spaced out my spending. I know when I have a deal pending, when I'll be able to apply the proceeds from that toward my debt. Usually when I sell a house, I pay off all my debts: my credit cards, Lowe's, Home Depot and the line of credit. I'm using it for short-term cash flow—working capital, basically—and then paying it off within a three- to five-month period.

How much did you shop around?

I wasn't focused so much on the rates because the rates all seemed to be pretty similar. They just take the federal rate and add a few percentage points on top of that. I was more focused on who would listen to me. It ultimately came down to two banks at that point, and I chose one of them because I felt I had a better relationship with the person in charge of small-business lending.

Was there anything that you would highlight in these conversations with lenders that you felt helped progress your conversation?

I always came prepared. I always had a portfolio to present to them before they even asked for anything. They could see upfront that I'd already executed deals and that my business was already up and running. It helped show that I'm currently active in the industry. I thought that was very helpful, to have a prepared package via email or hard copy. Try to highlight a portfolio of your work and what you've done in the industry.

When did you feel you were able to take on debt financing?

It was a matter of scale. At a certain point, I really felt like I could do two or three house flips simultaneously. I didn't base this decision based on my revenue. When I felt I had gotten more efficient and could take on more business, I decided it was a good time to reach out to lenders, speed up my process of growth and have some extra funds to supplement my cash flow. My sales cycles also tend to be long when I have to wait for buyers to go through the mortgage process. Basically, I finish my work and wait 30 to 45 days for buyers to actually buy my houses, which just uses up my cash.

From what you were saying earlier, it seems like your relationship with your lender is also pretty important. Has that ever come in handy?

Yes, they increased this year. In 2018 I went back to them and said, "I'd like to re-evaluate my business." I increased my credit limit from $50,000 to $200,000 in just two years.

Was it your business or your relationship that attributed to the increase?

I'd say three things: the relationship with the bank, the performance of the business and also the good standing of the account. I never made any late payments, which definitely helps. I'm sure if I had late fees and missed payments it wouldn't be the same situation.

Did they give you any discounts as well?

No; usually with the banks you get an upfront discount on the monthly percent that you pay if you have a banking relationship with them. So if you are running your business account through their checking and savings accounts, they usually take off a quarter of a percent or half of a percent. That's usually the discount that community banks do once you run your business through their bank.

You also mentioned that you use credit cards. Are those business credit cards or personal credit cards?

I have a mix. It's been great because I've been taking advantage of the different award travel and cash-back promotions. All of that is helpful since I buy lots of materials. It is generally pretty easy to hit those sign-up bonuses with my business spending.

Looking back, is there anything you'd do differently?

I probably would've created my LLC earlier on because I was doing everything as a sole proprietor through my personal name initially. That's what hindered me from having the tax returns in my business name sooner, (which affected) my official age of business.

I'd say, if you feel you can be financially responsible, it's a no-brainer to get a loan. It's fresh air for the business, to have these available funds in a line of credit or these promotional cards, because they speed up the growth of the business. For me, instead of doing one renovation and flip at a time, my financing got me to a point where I could do two or three renovations, and speed up the growth of the company.

Justin Song

Justin is a Sr. Research Analyst at ValuePenguin, focusing on small business lending. He was a corporate strategy associate at IBM.