What questions should a business owner ask the bank when considering a purchase?
Asking your banker and accountant to assist in determining the affordability of a purchase, along with measuring what is better — buying or leasing — is crucial.
Both the bank and the borrower want to be comfortable with the cash flow required to service the debt.
Your lender should address questions such as: What are the total costs to secure the loan? What are the projected monthly principal, interest, real estate taxes and insurance costs? What loan covenants will be in place? Is additional banking required to be established with the bank? Are there prepayment penalties to be aware of? What are the positives and negatives associated with this loan option?
Relationship banking is preferred by both the bank and the customer. The bank and the business owner benefit when they partner to build a long-term relationship based on mutual trust instead of approaching a loan as simply a business transaction.
Aside from the SBA program, what other financing options are available?
A relationship banker will help you explore various financing avenues based on your financial situation so you can decide which is most beneficial.
You can take out a conventional loan for commercial real estate, which may require a down payment of 20 to 30 percent, depending on the financial institution.
Another option is borrowing in your name personally, using personal assets such as your residence for collateral.
But an SBA 504 loan might be the best option, especially in cases where freeing up additional cash for a down payment is difficult for a business. Injecting 10 percent cash (504 loan program) versus 30 percent (conventional loan) will preserve cash for working capital needs for operating the company.
And the process has become easier. Previously, the amount of paperwork was intimidating to the borrower, but that is no longer a concern, as your relationship banker will walk you through the process and take on the majority of the paperwork involved.
Any final advice for a business owner considering purchasing property?
Don’t shy away from purchasing real estate because of what you hear about low market values or lack of financing. The fact is that now may be a good time to purchase if you partner with the right bank and take advantage of attractive financing options.
But it’s not a simple decision. Analyzing the costs, risks and rewards requires an investment of time and effort by both the business owner and the bank to determine whether buying or leasing is the right choice.
Roger Schnorr is SVP of business banking at Old Second National Bank, Aurora, Ill. Reach him at [email protected] or (630) 330-2386.
