If you’re a small business owner, you may have contemplated whether it’s better for your company to continue leasing property or to buy it. You may have already established a lease with an option to purchase from your lender, giving you a clearer path to ownership, or you may be considering your financing options while searching for new property.
In this article, I’ll discuss the lending options you have available to you as well as the benefits and potential drawbacks of leasing versus purchasing property.
Lease With An Option To Purchase
A lease option is a type of loan contract used in both residential and commercial real estate financing that allows the renter the option to purchase a property outright after they have rented for a specified amount of time. This differs from a lease purchase where parties are bound to a sales contract agreement.
This type of lease is ideal for buyers who cannot fund a down payment on their own as it requires less money up-front than a traditional mortgage.
It’s also advantageous for borrowers who are relocating their business, and need time to resolve credit issues or sell their previous property.
Down Payments: Is An SBA Loan Or Conventional Mortgage Better?
If you meet its qualifications, you may be able to apply for a loan from the Small Business Administration (SBA).
SBA loan programs are designed to finance the purchase of fixed assets (such as real estate) at below-market rates, and its loan programs are tailored to the specific capital needs of your developing business.
There are two SBA programs available: 1) SBA 7a and 2) SBA 504. Each can be used to finance the purchase of commercial real estate, such as an office or warehouse, and each generally only requires a 10% down payment from the buyer. The key difference is that the SBA 7a program is a variable rate program with a 25-year amortization and no balloon payment whereas the SBA 504 is a fixed rate program with half maturing in 10-years (requiring a balloon payment) and the other half maturing in 20-years. There are a myriad of other difference between these two programs which we will feature in a subsequent blog post.
Alternatively, conventional fixed rate loans are widely available from most banks and credit unions and have flexible terms. While rates and fees are typically lower than SBA loans, most lenders will require 20-30% down payment.
An SBA loan is usually more suitable for borrowers who lack the ability to make a larger down payment, while a conventional mortgage may be better if you are seeking more flexibility and keeping fees to a minimum.
Private Lender Options
While borrowing from a bank usually offers the lowest rates, they are risk adverse, meaning approvals are difficult to obtain. They typically also require the borrower to provide annual financial reports.
Private lenders, however, offer short and long term options that might be more suitable.
Short term solutions should only be used as a last resort because the fees and rates are usually much higher than longer-term permanent solutions. Private, long-term products offered by private lenders can be an ideal alternative when your business is turned down by the bank. They offer various programs, including fixed rate options with 30-year terms and no balloon. While rates are typically slightly higher than banks, these programs do not require financial reporting covenants and can be funded in far less time than with a bank.
Short-Term Gains Or Stable Success
The decision to lease versus buy commercial property will not only depend on down payment factors, but also your long term plans. For example, if you anticipate high growth that will necessitate moving to a bigger space within a few years, it may make sense to lease.
Conversely if your plan on remaining in one place for a long period of time, then investing in a property may be less expensive than leasing. Although you pay more upfront for ownership, you are able to deduct mortgage interest on your taxes, and you have freedom to do as you wish with your new property.
Ownership will also shift other costs to you, such as taxes, insurance, and maintenance, which are typically covered by the landlord in most leases.
Ultimately, the decision of whether to buy or lease a property depends on the status of your business.
Like the other factors I’ve touched upon, the “right” solution will look different for every business.
If you need to make a short-term loan to make a quick payment or if your business is just finding its feet, finding a reliable private lender may be the best and only option for you. If, however, your business is ready to lay down roots and settle in for the long-haul, then securing long term funding from a bank or private lender would make the most sense.
Think About Your Financial Future
If you currently have a lease with an option to purchase, or you are unsure whether leasing or purchasing a property is the right move for your business, you have many important choices to make.
No solution is going to be absolutely perfect, but if you carefully consider the financial status of your business and how it’s projected to grow in the near future, than specific options will certainly stand out as preferable to your situation.
Raisal is here to help you find the financing you need, on your terms, and in an efficient, cost-effective manner. With a click of a button, our interactive, online platform instantly connects you to dozens of lenders and loan programs that are algorithmically matched to fit your specific deal. Our loan advisors will counsel you through the process and help you make an informed decision on what makes sense for you. Best of all, you’ll never have to step foot in the bank!