Guest post by Richard Gray, Senior Vice President, Commercial Lending, Bank of American Fork
Since coming out of The Great Recession, business owners and individuals are increasingly aware of the way debt can be harmful. However, debt can also be good for businesses and now is a good time for stable companies to consider debt for expansion or revenue growth—values are stabilizing, but are still low compared to historical values. If your business is renting or leasing space, consider putting away some equity for yourself.
Though this recession has been toughest on small businesses, some of the greatest opportunities currently lie in the commercial real-estate market. Buyers can now access prime real estate for much less than a year or two ago, particularly in the commercial market where vacancy rates are up. Cash-starved owners and foreclosure sales have resulted in an unusually high volume of commercial properties priced very low. While there’s still abundant supply, small business owners should seriously consider whether now is the right time to purchase commercial space.
Business owners should consider the different types of financing available, depending on current resources, current needs and strategic plans.
One of the best financing options for Utah’s small businesses seeking to purchase or construct owner-occupied real estate is Small Business Administration, or SBA loans, which are specifically designed to help companies grow and prosper. They are ideal financing vehicles for office buildings, warehouses, retail outlets and special purpose-type facilities, such as restaurants, lube shops or car washes. And thanks to the federal government’s efforts to stimulate the economy, these types of loans are more plentiful than ever.
Because SBA loans are partially guaranteed by the government, most banks are willing to make them, even to businesses that may not qualify for a conventional loan. SBA loans are also less capital-intensive, requiring just 10 percent to 20 percent down, versus the 30 percent to 35 percent down needed for conventional loans.
If you’re worried your business may be too big to qualify for an SBA loan, know that a small business is defined as having less than 500 employees and less than $7.5 million in annual revenues (depending on the industry). This means 95 percent of Utah companies are eligible.
Another answer to financing for some small-business owners is to obtain a personal loan to purchase a building and then rent the building back to the business. One of our customers recently did this: the company had outgrown the office/manufacturing/warehouse building it had been renting. The owners found a new facility and, because they were seeking to use the building for the long term, considered whether or not they should purchase the building. Their main concern was the consequence of taking capital out of their business to make the purchase.
After analyzing the owners’ own finances, I recommended they consider purchasing the building under their personal names and then have their business rent it from them. This model allows the company to utilize its capital to grow the business, while giving the owners an opportunity to increase and diversify their personal wealth with commercial real estate.
Business owners can also consider conventional loans. Conventional financing requires a larger down payment than an SBA loan. Property values and interest rates are historically low, and regardless of how business-owners finance their buildings, now is a good time to consider buying.
When the opportunity is right, small businesses and owners can greatly benefit by owning their own commercial property. The money they pay in principal toward a real-estate loan each month goes towards building equity instead of lining someone else’s pocket. They have more control over their environment and can put money into a long-term asset that meets their specific needs instead of improving someone else’s building. Ownership also insulates companies from higher rent payments, which are likely to surge as the economy recovers.
Business owners can offset costs and leverage current commercial real-estate rates to plan for their future by purchasing a building they can grow into. As long as the business occupies at least 51 percent of the building, it can qualify for an SBA loan. Under this scenario, a company can buy the property now at lower-than-normal costs, lease out the other 49 percent until it needs the space, and use the rent it receives to cover part of the building loan payment.
Business owners who are just beginning to think about buying their building can prepare now. Owners can use the rule of thumb that if the price of the building times one percent, which would be a rough idea of principal, interest and taxes, is equal to or less than their current payment, it may make sense to consider buying.
While the economy has produced challenges for everyone, it has also created one of the greatest buyers’ markets for commercial real-estate in recent history. There are many attractive options for small businesses. If you are qualified to purchase commercial real estate, this might be the ideal time to invest in yourself and your business.
Richard Gray is senior vice president of commercial lending and SBA lending at Bank of American Fork, Utah’s community bank leader, an Equal Housing Lender and Member FDIC. Richard also manages the bank’s Murray branch, and he has assisted local small businesses in obtaining SBA funding for more than 25 years. He serves on the board of directors for nonprofit Kostopolus Dream Foundation and was the chairman for nonprofit Utah Microenterprise Loan Fund, Salt Lake City.
This article first appeared in The Enterprise.