Are You Using the Right Type of Funding for Each Part of Your Flip?

Question

One thing I see with investors is trying to use one type of financing for every expense on a project.

The purchase, rehab, materials, contractor payments, carrying costs, and unexpected expenses don’t always need to be funded the same way.

Depending on the situation, a stronger funding strategy could include:

• 0% APR business credit cards for 9–12 months
• Business lines of credit that don’t report utilization to your personal credit bureaus
• Business loans
• Revenue-based funding
• SBA 7(a) financing for qualifying situations

The goal isn’t just getting access to capital, it’s having the right capital available at the right time without unnecessarily tying up all of your own cash.

For the flippers here: what part of a deal is usually the hardest for you to keep funded, the purchase, rehab, or carrying costs?

Diana Khan · Answer

@Nicholas Floyd, one thing I’ve seen with investors is that using different funding sources can work well, but it gets risky when the repayment terms are not looked at together. I’ve seen deals where the purchase was funded one way, the rehab another way, and carrying costs somewhere else, but nobody stopped to look at when each payment was due, what had to be paid first, or what happened if the project took longer than expected.

For me, the funding plan should be mapped out before the money is used. I would want to know the interest rate, maturity date, personal guarantee, whether there is a lien or other security, and what happens if the property does not sell on schedule. A flip can be profitable on paper and still become stressful if too many payments come due at the same time. The best funding setup is not always the one that gives you access to the most money. It is the one that still gives you room if the project runs late.

I like the way you are thinking about matching the funding to the actual part of the project, and I’d be glad to stay connected and keep up with what you’re seeing in this space.

Stuart Udis · Answer

@Nicholas Floyd The downpayment funds and the float needed to advance construction when construction loan draws are paid based on completed progress are the two main constraints investors undertaking flips experience.  The funding sources you recommend certainly can be used to bridge those gaps although the downpayment portion is questionable because most lenders want to understand the sources and uses and doubt many construction loan lenders will approve a loan application when the borrower admits the downpayment funds are debt and not actual equity.

Nevertheless, as Diana correctly pointed out let's assume contingencies arise outside of the drawable construction loan proceeds? Then what happens if the flip can't be sold and has to be turned to a rental and valuation or cash flow doesn't support a cash out refinance. How is the credit card paid off? How is the unsecured loan paid off?  Only individuals who have liquidity and are using these strategies you suggest to ease operations and not to replace or meet equity needs should be considered. That is the type of irresponsible funding decisions that get a lot of people into trouble.

Nicholas Floyd · Answer

@Stuart Udis

I’d respond by agreeing with the strongest part of his point instead of debating him. That will make you look more knowledgeable and responsible in the funding space:

Stuart, I agree with you, especially on the equity piece. I’m not suggesting that someone disguise borrowed funds as equity or use unsecured business funding where the construction lender requires true cash equity.

Where I see business funding being most useful for flippers is as a secondary liquidity tool, covering draw gaps, unexpected rehab costs, carrying costs, materials, or other expenses that fall outside the construction loan.

That could include a business line of credit, 0% APR business credit during the promotional period, or other business financing, but only when there’s a clear repayment and exit strategy. If the property doesn’t sell or refinance as expected, the investor still needs enough liquidity to service that debt.

So I completely agree that the strategy has to be structured around the borrower’s overall financial position,not simply around how much capital they can qualify for.