At some point in most companies history, the goal is to purchase a facility instead of paying rent to a landlord. Most of the time its when they have outgrown a leased facility and realize that a building might be a wise investment for the company. As much of a milestone as this is, it can also be a stressful time for a company as there are so many options available and so many different things to learn in a short period of time. In many cases, this is the biggest foray into small business financing that the company will undertake, so it's not unusual that there would be some jitters.
Unless your company has stockpiled a lot of cash, with today's real estate prices, you will most likely need a loan to make this purchase possible. With owner-occupied property, banks will typically lend around 80% of the buildings cost or appraised value (whichever is lower). There are always ways to ge around putting less down, such as offering other collateral to increase the total. The most common ways of doing this are to offer up business assets or a 2nd mortgage on the owners residence. Another good route is an SBA 504 loan program which allows you to put down 10% as opposed to 20%. This is a good option and there are other advantages, but as with any government entity, you are going to have more fees and more paperwork.
The good thing about real estate loans, you can generally qualify for a lower rate than your run of the mill business startup loan. Real estate is still considered very strong collateral, in comparison to accounts receivable and inventory, and this all plays into what rate the bank is willing to offer you. Commercial loans differ from residential in that the rates are not locked for as long as residential loans. With a residential mortgage, banks sell those to secondary financing companies immediately after funding. With a commercial loan, they stay on the books so they are not as willing to offer a long term rate. What you will normally see is a five year fixed rate and a twenty year amortization, which simply means your rate is locked for only 5 years but your payment is as if you have a 20 year loan. As more and more banks enter the market, it has forced lending institutions to offer more flexible rates to its commercial clients. This includes fixed rates as long as 10 years and amortization as long as 25 years. This is good news for the borrower. Now, the way loans are priced is off the treasury rate. Typically, banks will offer between 2%-3% above the appropriate treasury rate. So, as an example, if you are seeking a 7 year loan with a 25 year amortization, most banks will price that somewhere between 2-3% above the 7 year treasury.
Ok, once you're gotten the initial scoop from your local lending institution, you need to get ready to submit a loan application. Typically, they will ask you for your last 3 years of business financial statements of all related companies. Also, they will likely require a personal guarantee and ask for personal tax returns and a personal financial statement from the owners of the company. While you're in there, they will probably also try to cross-sell you some other services, such as merchant services, a payroll services, or wealth management.
While the entire procedure may seem a little daunting, it is generally easy to do if you have your finances in order. Obtaining a commercial mortgage, while time consuming, can also be the easiest to get. With the building acting as collateral, most banks feel comfortable getting a little more aggressive since real estate tends to be a stable piece of collateral that holds is value well. If you do your homework and come prepared, it can be a very easy and pleasant experience for you and your company.
