Factors that may help your buy-vs.-lease decision

Don Mercer
Posted by Don Mercer
Small Business Banking

I frequently get questions about what I call the “Small Business American Dream”: Business owners who want to own their own facility. It’s an ambitious goal, and one that requires careful planning.

Young-ish man sitting in creative office space, looking at his laptop.In my view, there’s a right time and a wrong time for a business to invest in a building. Here are 3 statements that suggest you may be ready to buy your building, and 3 statements that suggest the timing may not be right:

Ready-to-buy indicators: 1) I want to lock in a fixed cost. At some point many business owners tire of rising lease rates and the uncertainty that leasing creates. Forecasting cash flow can be difficult if you don’t know what sort of future rental rates the business may face. If you acquire a facility, you may choose (subject to credit approval) a fixed-rate commercial real estate loan so that you know your mortgage payment month-to-month, year-over-year, and can manage cash flow more effectively.

2) I want control of my facility. If you own it, you can paint it orange or purple, put in tile floors or hardwood, add a new production line — whatever you want (with the proper government or regulatory permits and, in some cases, lender approval). Some businesses want the flexibility to make improvements without seeking permission from a landlord. As an owner, you also have the flexibility to sublease space.

3) I want to take advantage of low interest rates. Interest rates have hovered near historic lows for quite some time now, enticing many business owners to look into the option of buying their facility. The outlook is for rates to begin to rise gradually later this year, so if you’ve been on the fence about buying, now may be a good time to talk to a banker about the potential pros and cons.

Not-ready-to-buy indicators: 1) My business is growing super-fast. When a business is growing rapidly — say 20% per year — you are typically capital-intensive. You may need all your capital to go into supporting continued growth: hiring people, buying raw materials, expanding distribution, and marketing. Now may not be the time to lock up capital in a fixed asset. The one caveat might be SBA financing, which can provide qualified borrowers with 90% financing and may preserve some hard-earned working capital to run the business.

2) I don’t know what size facility I need. If you are expanding (or contracting), you may not be able to forecast the size of a facility your business will need when things stabilize. It may not be wise to buy a facility under such conditions, since you might outgrow the building in a relatively short timeframe. Better to continue to lease until you are able to forecast how much space you’ll need for the next few years as your business changes.

3) I’m anxious about property values. Real estate prices do not always rise, as we all learned during the 2008-09 Great Recession. If you are skeptical about future property values, you may not want to invest in a building that may not appreciate.

Buying a building for your business is a big decision. There are a lot of costs, including the down payment, insurance, property taxes, and any necessary modifications. But there are a lot of advantages, too.

As I’ve written previously, if your business is working from a strategic plan you’ll have a clearer idea whether the time is right to acquire property. Ask yourself: What are your near-term and long-term objectives, and will owning your facility help you reach those goals?

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