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. 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 good route is an SBA 504 loan program which allows you to put down 10% as opposed to 20%. As with any government related program, this has higher feeds and more paperwork. The plus side is that its about the only place that you can get 20 year fixed rates, generally at much lower rates than a bank will offer.

The good thing about real estate loans, you can generally qualify for a lower rate than your run of the mill business startup loan. Since the note will be secured by a piece of physical real estate, banks tend to be more aggressive with rates. 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. This is good news for the borrower. 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. Typically, they will ask you for your last 3 years of business financial statements of all related companies. Also, they will likely require a personal guarantee and ask for personal tax returns and a personal financial statement from the owners of the company. 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 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.