What Types of Financing Alternatives Are Available for a Building Purchase?
- Jan 16, 2013
I am often asked the question by business owners about what types of financing alternatives are available should they decide to purchase a building to occupy their business within. The two types of financing available are either conventional financing or Small Business Administration financing (SBA).
The general principle of conventional financing is the borrower would go to a bank, credit union, or other financial lending institution and typically borrow 75-80 percent of the appraised value of the property. I use the word “appraised value,” because a seller may have one price in mind, yet when the appraisal is done, the value is less than the seller’s desired selling price. In this instance, the buyer would have to put more money down, the seller would need to reduce its purchase price, or other creative options would need to be explored, such as the seller carrying a note. Conventional financing is generally used if the borrower is, for whatever reason, unable to qualify for an SBA loan.
There are two types of SBA loans. These are called the 504 and the 7A programs. I won’t get into the specifics of these two programs as that can be an article in itself. With SBA financing the major benefits to the business owner are that the buyer needs to contribute only 10 percent as a down payment, which helps conserve cash for the business owner to run their business. The loans have an amortization period from 20 to 25 years depending on the program and generally have a competitive interest rate. Some of the pit falls of SBA financing is that their fees generally are higher than in conventional financing and personal guarantees of both the borrower and the business are mandatory. Many conventional loans nowadays also require personal guarantees if the loan to value is not exceptionally low.
I recently closed an escrow with a client that would have qualified for SBA financing, however this group had enough available discretionary cash that they preferred to do a conventional loan with the increased down payment in order to receive more favorable terms. When deciding on the financing options, it is best to consult multiple lenders in order to determine which loan would be the most favorable to the borrower. Purchasing real estate to run your business is an exciting opportunity and one needs to remember that whether you lease or buy, you pay for the space you occupy.