At some point in most companies history, the goal is to purchase a facility instead of paying rent to a landlord. Most of the time its when they have outgrown a leased facility and realize that a building might be a wise investment for the company. 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.

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). 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 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.

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. 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. What you will normally see is a five year fixed rate and a twenty year amortization, which simply means your rate is locked for only 5 years but your payment is as if you have a 20 year loan. 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. 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. Most banks will seek 2-3 years of financial statements or tax returns on the company so they can get a history of whether the business can support the new debt payments. 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. 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 do your homework and come prepared, it can be a very easy and pleasant experience for you and your company.