There comes a time in every business owners life when it makes sense to purchase a building to operate out of. In a lot of instances, the reason to purchase a building is simply the company has outgrown its space and they need to decide if they should continue leasing a larger space or purchase a building as a long term investment. 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. Most likely its the the largest facet of small business finance that their company will face.

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). If you need to put less down, then you can get creative by either offering up additional collateral, such as your home or other business assets. Another popular option is an SBA 504 loan program. This is done in cooperation with a CDC and involves the bank lending 50% of the purchase price, the CDC issuing a bond for 40%,and the owner putting in 10%. This is a good option and there are other advantages, but as with any government entity, you are going to have more costs and more paperwork.

As far as rates go, you can typically qualify for lower rates than your typical business startup loan. Since the note will be secured by a piece of physical real estate, banks tend to be more aggressive with rates. 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. The most common terms are 5 year fixed rate balloon with a 20 year amortization. In recent years as competition has stiffened, its not uncommon to see up to 10 year fixed rates and up to 25 year amortization. This is good news for the borrower. Rates are typically based off of the corresponding treasury rate. Typically it's anywhere from 175 basis points to 300 basis points. 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. As they are reviewing your financial statements, expect to be cross-sold on some of the bank's value-added services like payroll services, brokerage accounts, merchant accounts, or bank programs for the employees.

While the entire procedure may seem a little daunting, it is generally easy to do if you have your finances in order. When compared to other types of business loans, commercial mortgages rank on the easier side due to the strength of the collateral. 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 ask the right questions and come prepared, then it can be a very easy process for your company and you can be in your new building in no time.