I had a lot of big questions to come in during the past week covering topics like interest rate calculations for building permits, multi-family finance, hotel finance and private money lenders. The one that was most interesting concerned the small business real estate financing.
Buying real estate for your small business offers you, as a business owner, several advantages over leasing. The first advantage is that property purchase financing helps small businesses grow into larger companies by maintaining capital during expansion. Growing a business is a cash management balance sheet and the less money buried in facilities means more money for other necessary functions.
The other benefit is tax-related. Funds to support the business can be redirected to help your personal portfolio by building equity in the commercial real estate as residential. The rental fee that benefited your previous landlord will now help you reduce current corporate income from a tax point of view, but still keep it in your pocket through your property. Many owners take the property in their personal names and have the business tax rent for them to cover the propertys operating costs. Some even have additional tenants to supplement cash flow.
The third advantage relates potentially to your property. If the property is in a personal name and the business is terminated, sold or terminated for some reason, that asset is not part of the business transaction. This can simplify an otherwise complex situation.
There are two types of small business real estate loans. One is guaranteed by Small Business Administration SBA, the other we call conventional. Both offer a business owner a loan of up to 90% of the purchase price of the property used for the business. Government-guaranteed funding tends to have a slightly lower tax rate, but requires much more paperwork. Conventional funding is more flexible by offering different documentation requirements and possibly faster financing.
Conventional Small Business Property Financing
In recent years, some lenders have created SBA look-alike or conventional programs that have fewer restrictions than SBA-guaranteed funding. For example, they allow the owner to occupy less space in the property than the 51% required by the SBA, allow reduced or EZ documentation no return and does not require additional collateral, such as a primary residence. Depending on the type of property financed, conventional small business loans can provide up to 90% loan financing LTV, although some types of special purposes, such as hotels, restaurants and gas stations are limited to lower LTV. Construction for permanent loans is also available on a conventional basis, enabling a business owner to tailor a property for the companys needs.
Small Business Administration
Small Business Administration is a quasi-government agency that is set up to help small businesses get funding for their business. The primary form of collateral for SBA loans is property owners for property owners. SBA funds can be used for a variety of purposes, including acquisition of real estate, commercial properties, working capital and other legitimate business purposes.
SBA loans are usually used for single or single properties where the owner of the property is the owner of the business using the property. The SBAs rule of thumb is that 51% of the property must be used by the owner to qualify for the Agencys guarantee. There are often other restrictions that are made for the owner to get this funding, such as: Annual reporting and cross-insurance with the owners primary residence. SBA finances office buildings, retail offices, automotive, warehouses, light industrial manufacturing facilities and a host of other real estate.
Most federally regulated financial institutions offer some form of SBA-guaranteed funding. Its too profitable for them to pass. Unfortunately, not everyone is good at it.