It may seem that now is not a good time to purchase a building for your business. You’ve heard that financing is hard to come by and that banks aren’t looking to lend. Property prices are low, but so is available cash for a down payment on property. And what about money for build-outs, equipment, furniture and fixtures?
The good news is that businesses can take advantage of attractive real estate prices and move into a purchase with as little as 10 percent down and low fixed-rate financing with programs such as an SBA 504 loan.
And it’s not true that banks aren’t lending, says Roger Schnorr, senior vice president of business banking at Old Second National Bank.
“We are lending about $31 million in new money each month, and about one-third of that is commercial loans,” says Schnorr.
For businesses interested in purchasing owner-occupied real estate, in which the company occupies more than 50 percent of the space, there are financing programs available and the timing may be good for buyers.
“Every monthly loan payment a business makes is money toward building equity,” Schnorr says, suggesting that business owners sit down with their banker to discuss whether a property purchase makes sense for them.
Smart Business spoke with Schnorr about the strategies businesses can employ to purchase owner-occupied property rather than sinking dollars into lease payments each month.
What kinds of businesses are in the best position to purchase owner-occupied real estate?
Any business can consider a purchase today, but first it is recommended that you sit down with your trusted banker and/or accountant to review the numbers. If your business is planning to occupy the commercial space for quite a few years, it may be worthwhile to consider buying, no matter what type of business you operate.
The combination of lower property sales prices, attractive loan terms/interest rates and potentially reduced out-of-pocket expenses may prove to be an attractive opportunity to consider buying.
Tell me more about the SBA 504 program.
A very attractive program for businesses is the Small Business Administration 504 loan. This requires as little as 10 percent of the total project cost as a down payment from the borrower. The loan can cover up to 90 percent of the total cost of real estate, furniture, fixtures and equipment.
For example, if a business purchases real estate that costs $800,000 and furniture/fixtures that cost $200,000 for a total project cost of $1 million, the buyer must provide a $100,000 down payment. Then, $400,000 is placed in a government debenture, and 50 percent of the project cost is financed by the bank.
The government stimulus package promotes reduced fees for the SBA 504 program.
What questions should a business owner ask the bank when considering a purchase?
Asking your banker and accountant to assist in determining the affordability of a purchase, along with measuring what is better buying or leasing is crucial.
Both the bank and the borrower want to be comfortable with the cash flow required to service the debt.
Your lender should address questions such as: What are the total costs to secure the loan? What are the projected monthly principal, interest, real estate taxes and insurance costs? What loan covenants will be in place? Is additional banking required to be established with the bank? Are there prepayment penalties to be aware of? What are the positives and negatives associated with this loan option?
Relationship banking is preferred by both the bank and the customer. The bank and the business owner benefit when they partner to build a long-term relationship based on mutual trust instead of approaching a loan as simply a business transaction.
Aside from the SBA program, what other financing options are available?
A relationship banker will help you explore various financing avenues based on your financial situation so you can decide which is most beneficial.
You can take out a conventional loan for commercial real estate, which may require a down payment of 20 to 30 percent, depending on the financial institution.
Another option is borrowing in your name personally, using personal assets such as your residence for collateral.
But an SBA 504 loan might be the best option, especially in cases where freeing up additional cash for a down payment is difficult for a business. Injecting 10 percent cash (504 loan program) versus 30 percent (conventional loan) will preserve cash for working capital needs for operating the company.
And the process has become easier. Previously, the amount of paperwork was intimidating to the borrower, but that is no longer a concern, as your relationship banker will walk you through the process and take on the majority of the paperwork involved.
Any final advice for a business owner considering purchasing property?
Don’t shy away from purchasing real estate because of what you hear about low market values or lack of financing. The fact is that now may be a good time to purchase if you partner with the right bank and take advantage of attractive financing options.
But it’s not a simple decision. Analyzing the costs, risks and rewards requires an investment of time and effort by both the business owner and the bank to determine whether buying or leasing is the right choice.
Roger Schnorr is SVP of business banking at Old Second National Bank, Aurora, Ill. Reach him at email@example.com or (630) 330-2386.