If your business has grown its custom beyond its capacity to meet demand, it might be time for you to consider expanding. You might find your business needs better served in a rental office space, or perhaps purchasing a building outright would be more suitable. Whatever your intended avenues for expansion, you should consider your finance options before taking the plunge.
Expansion into a new location is expensive, given the cost of purchasing a property and making it fit for purpose. As such, it’s essential to find a suitable form of finance to help fund your growing business. For many businesses, their course of action is to secure a business loan for buying property. In this article, we will discuss this type of loan, ensuring you have the information you need to make the right choice for your situation. Let’s get started.
What is a business loan for buying property?
A business loan for buying property, usually referred to as a commercial real estate loan, is a type of loan that aims to provide businesses with the funds they need to purchase property. An alternative use, though still quite a common one, is to fund the renovation of property for business use.
Commercial real estate loans can be used to fund the purchase or renovation of a wide range of buildings. These include warehouses, apartment complexes, retail buildings, office spaces, and so on. Provided the building will be used for commercial purposes, a commercial real estate loan can be used to drum up the funds.
Commercial real estate loans tend to be much shorter in length than residential loans. Where an average mortgage would have a repayment term of roughly 30 years, a commercial real estate loan can be as short as 5. This short length, coupled with the harsher penalties for making an early repayment, can make commercial real estate loans a riskier prospect for small businesses.
Buying or renting commercial property – which is best?
Before you take out a business loan for buying property, you first must decide between renting or purchasing outright. Naturally, there are advantages and disadvantages to both. Similarly, your choice will impact what kinds of commercial real estate loans are available to you. Let’s consider the implications for both scenarios.
Renting commercial property
Although a growing business might make expansion necessary, it does not always warrant the purchase of a new property. Your business’s growth might not be enough to sustain such a purchase, or finding a suitable property for sale might be too difficult. Either way, renting a commercial property is more than a good alternative.
In the short term, renting a property is much cheaper than purchasing a property, even considering the usual practice of requiring several months of rent upfront. It can, however, take some time and money to refit the property and make it a suitable workplace for your business operations. For example, you might need to pay for improved internet or communications infrastructure, if the rental property isn’t up to scratch. Additionally, you may need to pay for entirely new renovations and additions to the property. While the property owner may contribute toward these costs, most of the money will need to come from your pocket.
This means that although cheaper, renting a commercial property is still demanding on your business’s finances. As such, turning to rental property finance could be what you need to get yourself situated easily, allowing you to focus on making your rental payments and getting underway with your business operations.
Buying commercial property
Alternatively, you could choose to buy property for your business instead of renting. There are many reasons to do so. Most notably, any property you purchase can double as an investment, rather than an expense. As with any property, commercial property can appreciate over time, allowing you to recoup some of your investment when the time comes to sell it, or possibly even making you extra money on top. If you’d rather keep the property in your portfolio, you could instead choose to rent it. This would bring extra money into your business’s accounts, giving you that bit more in terms of financial flexibility.
Investment isn’t the only reason to buy, however. With owning your property comes control, allowing you to make whatever changes to the property you deem necessary, without the need for your landlord’s approval. This can be excellent for flexibility, as some decisions must be made at short notice.
However, buying a property does have its drawbacks. The most obvious is the cost, as buying a property and making it suitable for your business can get very expensive. Renting, on the other hand, is a much cheaper alternative with little commitment. This allows you to meet your business needs without incurring major expenses on your part, allowing you to be more flexible in the future.
Types of commercial real estate loans
To fund the expansion of your business, you have several options. Any given business loan will fall into a particular category, each with its own applications. Before taking out a business loan for buying property, it’s important to understand each category. They are as follows:
- SBA loans – Small Business Administration (SBA) loans are a type of guaranteed loan. Their main attraction is their notably low interest rate, something complemented by other favourable repayment terms. However, they tend to be small, and can take a long time to obtain. This makes them ideal for rentals and other such expenses, though not a great fit for a property purchase.
- Business lines of credit – For businesses with a stellar credit history, a business line of credit could be the perfect solution. They work similarly to a credit card; your lender will allot to you an amount hinged upon your credit history, you can borrow as you need, and make repayments as necessary. Once the sum you borrowed is repaid, it can be borrowed once more later down the line. In this sense, it is much like a revolving credit facility. A business line of credit is incredibly flexible, allowing you to borrow as you like. Moreover, it can be as expensive or as cheap as you make it. Given that you will only pay interest on what you borrow.
- Term business loans – Term business loans are the most common, working just like any average loan. You will agree to a set of terms and the loan’s duration, receive a lump sum, then make repayments plus interest. They can be secured through traditional lenders, such as banks or credit unions, or through private lenders. Your rates are largely dependent on your risk factor, something informed by your credit history. The better it is, the more options you will have, and the less you will have to pay. Term business loans can be used for a wide range of purposes. Facilitating the purchase of equipment or a new property.
Conclusion
There are many options available to you when searching for a business loan for buying property. To ensure you make the right choice, you should weigh the specialties of each loan type against your situation. Taking out a hefty long-term loan for making rental payments isn’t likely to be your best bet. With a bit of due diligence, however, you’ll have your loan and your new property in no time.