You've made the financial projections, explored the options and decided to buy a building for your growing business. Now it's time to determine the best way to finance that purchase.
A healthy business may choose from a variety of options to help acquire this important asset, which not only will house your company for years but may eventually become an income-generating pillar of your retirement plan.
“You want to work with a banker who has experience in financing real estate through SBA and conventional loans," said David Cameron, City National Bank's head of business banking.
An experienced banker can help customize your financing options to maximize loan terms, minimize down payments and ensure your business has sufficient capital to customize or retrofit the property to suit its needs, he added.
A U.S. Small Business Administration 504 loan, designed specifically for owner-occupied commercial real estate and related fixed assets, offers appealing features. These long-term loans, provided by the SBA and participating lenders, generally allow businesses to borrow up to 90 percent of building costs at a fixed rate.
The borrower, who typically provides a 10 percent down payment for a loan with a 10- to 25-year maturity, may use the funds not only for the building and land purchase but also for renovations, parcel improvements, major equipment, furniture and certain other costs. An entrepreneur meeting the requirements could borrow several million dollars under the 504 program.
SBA 504 loan application turnaround takes a month or two, with the bank providing the initial review, followed by the nonprofit Certified Development Company that handles these loans for the SBA in a given region, and then the SBA itself.
Another option, the SBA 7(a) loan, designed for general business purposes, allows businesses to borrow up to $5 million for terms ranging to 25 years at variable rates, also with a relatively low down payment. (Fixed-rate options may be possible.)
Small businesses can use SBA 7(a) expansion loans for real estate but usually don't go that route, according to Cameron.
With their relatively low down-payment requirements, SBA loans can make borrowing easier than conventional commercial real estate loans, which often involve a 25 percent down payment. On the other hand, SBA loans typically impose higher fees.
Conventional options generally allow companies to borrow up to 75 percent of the property's appraised value and choose from a variety of terms, with fixed or variable rates and different maturity and rate-reset options.
In recent years, many businesses with sufficient cash flow have locked in low interest rates by securing 15-year loans that are fully paid off at maturity, according to Craig Caliger, City National Bank's manager of commercial banking. These terms often allow borrowers to put just 20 percent down, he said.
Typically, though, business borrowers opt for lower monthly payments by taking out 10-year loans amortized over 25 years and refinancing when the debt matures, Caliger said.
Cameron noted that City National often combines different types of debt to help a business purchase and retrofit a building, rolling a secondary loan into a real estate loan. A business that wants to purchase a building for $3 million and spend $500,000 on customization and improvements, for example, would need to put up $300,000 as an SBA 504 loan down payment for the purchase and could secure additional financing for the remodeling.
“Banks can provide financing for retrofitting and customization," Cameron said.
Borrowers should check with their banker to thoroughly examine the details of each option, including any prepayment penalties for fixed-rate loans.
As with any business loan, borrowers will need solid credit scores and should be prepared to provide the financial documents that the bank and the SBA may require, such as personal and business income tax returns, business financial statements, a debt schedule, and a business plan that includes financial projections.
Banks often look at two and sometimes three repayment sources, starting with business cash flow for owner-occupied buildings, Caliger said. The real estate itself serves as collateral that the bank could sell or lease should the business falter. Most lenders also will require the business owner to sign a personal guarantee document promising to pay back the loan.
In an owner-occupied building, the lender is really underwriting the business, he noted.
A good commercial banker, along with a CPA, can help a business owner analyze the numbers and determine which type of loan makes the most sense.
City National offers a relationship business that aims to serve the entire company, not simply provide a loan for a property. To learn more, contact us.
This article is for general information and education only. It is provided as a courtesy to the clients and friends of City National Bank (City National). City National does not warrant that it is accurate or complete. Opinions expressed and estimates or projections given are those of the authors or persons quoted as of the date of the article with no obligation to update or notify of inaccuracy or change. This article may not be reproduced, distributed or further published by any person without the written consent of City National. Please cite source when quoting.
City National, as a matter of policy, does not give tax, accounting, regulatory or legal advice. Rules in the areas of law, tax, and accounting are subject to change and open to varying interpretations. You should consult with your other advisors on the tax, accounting and legal implications of actions you may take based on any strategies presented, taking into account your own particular circumstances.
Loans and lines of credit are subject to credit approval.