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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. This can be an exciting and worrysome time for a company. Most likely its the the largest facet of small business finance that their company will face.

Most likely, you will need a loan to make this possible. If you are going to occupy more than 50% of the building, banks consider this owner occupied and want you to put in 20% of the purchase price. There are always ways to ge around putting less down, such as offering other collateral to increase the total. The most common ways of doing this are to offer up business assets or a 2nd mortgage on the owners residence. Another good route is an SBA 504 loan program which allows you to put down 10% as opposed to 20%. This is a good option and there are other advantages, but as with any government entity, you are going to have more fees and more paperwork.

The good thing about real estate loans, you can generally qualify for a lower rate than your run of the mill business startup loan. Real estate is still considered very strong collateral, in comparison to accounts receivable and inventory, and this all plays into what rate the bank is willing to offer you. Unlike residential mortgages, commercial loans are typically not sold in a secondary market. That means that the loans are kept on the individual bank's books and, therefore, they are not willing to offer such long terms. 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. Competition is a very good thing for borrowers. Rates are typically based off of the corresponding treasury rate. Typically it's anywhere from 175 basis points to 300 basis points. For example, lets say you are seeking a 5 year loan/20 year amortization for your commercial building purchase. Most banks will price that off of the 5 year treasury, so if that rate is 5% then you could expect a rate from 6.75%-8.00%.

After you've had initial talks with the bank, you'll need to get prepared for loan approval. Typically, they will ask you for your last 3 years of business financial statements of all related companies. They'll also require a personal guarantee of the owner of the company, so they will look for some statement of personal net worth as well as tax returns from all owners. 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. Obtaining a commercial mortgage, while time consuming, can also be the easiest to get. You have strong collateral in the building and you can also can justify the cost because you are eliminating an expense (rent) and just replacing it with the mortgage payment. 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.