Buying Space for Your Small Business? Keep These 5 Things in Mind
By: Lending Tree
Whether you’ve been working out of a rented storefront for years or want to start your entrepreneurship journey as a property owner, there’s a lot to consider before diving in and buying space for your small business. Buying property can already be a complicated process, and when your livelihood is on the line, the stakes get that much higher. Fortunately, by doing some footwork ahead of time, you can set yourself up for the smoothest transaction possible — or avoid making a purchase at all if you determine it might end up hurting your business in the long run.
Here are five important factors to consider before buying space for your small business.
1. Does renting make more sense?
Buying a storefront or office for your small business might sound like the obvious choice from a financial perspective. After all, with the property deed in your hands, you have a great business asset to leverage when looking for investors or business financing. And that’s not to mention the fact that you get to do whatever you want with the property, whether that means painting it canary yellow, installing an industrial kitchen, or knocking out a wall or three.
But depending on the health of your business, buying right away might actually be unwise — or even impossible. Unlike home loans, where you can sometimes get away with a down payment as low as 3%, small business loans usually require a down payment between 20% and 40%. That’s a substantial chunk of change, especially if your business is still in its fledgling stages.
And as always, when you own a property outright, you’re responsible for any maintenance, repairs and upgrades that are necessary. All of which is to say, if you’re considering buying space for your small business, it’s smart to ensure your cash flow is healthy and robust ahead of time so you don’t end up with a liability on your hands.
2. How much do you expect to grow?
Assessing your business’s current operations is an important step to take before buying property, but it’s also important to consider how your business might grow over the coming years. With a lease, it’s easy to simply move to a new location if you end up hiring more people or garnering a larger customer base than you’d expected. (Of course, if you’re really successful, it’s always an option to purchase another location, too.)
Projected growth can also give you important information about how much property you can afford today with an eye toward what your financials will look like tomorrow. A qualified financial planner who specializes in working with small businesses can help you ensure you have all your ducks in a row, both in the present and future tense.
3. What options do you have as far as financing?
Unless your margins are high enough that you can buy property outright in cash, chances are you’ll need to take out a commercial real estate loan in order to secure your business’s new home. The good news: There are plenty of options available to entrepreneurs in need of financing.
Commercial real estate loans work a lot like the mortgage you might use to purchase a house, but there are important differences to keep in mind, too. Just like a mortgage, a commercial real estate loan is secured by the property you’re buying, which means the property itself works as collateral for the loan. And like a mortgage, you’ll need to put down a certain amount of money up front (i.e. a down payment), in order to qualify. (More on qualifying for a business loan in just a minute.)
However, because commercial property tends to be larger and costlier than private property, commercial real estate loans generally come with higher maximums. Some lenders will offer loans as large as $5,000,000. However, because these loans tend to be riskier for lenders than home loans, the interest rate for commercial property loans tend to be higher than mortgage loan interest rates. The same is true of the minimum required down payment, as discussed above.
In addition, qualifying for a business loan works a little differently than qualifying for a private one.
4. How’s your business credit score?
When you apply for a loan for your small business, both your personal and business-related financial information will be reviewed. And that includes your business credit score, which works a little bit differently than the FICO score you’re probably familiar with in personal lending scenarios.
While a FICO score runs from 300 to 850, with 850 being the best, a business credit score is measured on a scale from 0 to 100. A score of 80 or higher is considered lower risk, while scores under 50 are higher risk.
In addition, business credit scores are cataloged and assessed by a slightly different set of agencies than personal credit scores: Equifax and Experian offer both business and personal credit scores, but Dun & Bradstreet and FICO’s Small Business Scoring Service (SBSS) work specifically with business credit reporting. You can learn more about your business’s standing by reaching out to these agencies directly.
Furthermore, your credit scores aren’t the only important factor lenders will consider. Along with the items that impact your personal credit — such as the amount of debt you owe and your personal cash flow — business lenders will consider other business-related factors while qualifying you for a loan, such as:
- Annual revenue
- Your fixed charge cover ratio, or FCCR, which is like a debt-to-income (DTI) ratio for businesses
- How long you’ve been in business
- The size and health of your industry
Keep in mind, too, that commercial real estate loans are not the only loans available to small businesses. While a commercial mortgage can help you buy, build or renovate physical property for your small business, you can also get an unsecured small business loan to help you cover other businesses expenses. Your business credit score and other financial information will also be important in order to qualify you for one of those loans, too.
5. What local regulations do you need to abide by?
Neither last nor least, if you’re considering purchasing a space for your small business, you’ll want to be sure you keep local regulations that apply to your industry in mind before you make the purchase. For example, local codes will determine the maximum safe occupancy of a given space as well as the required routes of egress (or exits). For restauranteurs, laws cover everything from industrial kitchen specifications to restroom requirements.
While the specifics will vary widely depending on exactly what kind of business you have and where you’re running it, knowing the requirements ahead of time will help ensure you purchase property that’s well suited for your business’s needs — or easily adaptable to meet them. If major renovations are required, knowing a basic cost estimate ahead of time can help you avoid unpleasant surprises that can delay your storefront’s grand opening and blow your budget.
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