By Gary Hemming, Commercial Lending Director
As your business grows, the decision to take on larger premises can seem like a big step. The property that you choose can make a big difference to the culture of your business and the way it operates.
On top of this, the decision you take can have a major impact on your finances in the long term. Of course, there are advantages and disadvantages to each route.
We’ve teamed up with Gary Hemming, Commercial Lending Director at ABC Finance Ltd to break down what they are, the finance available and how buying can help you hit your financial goals.
What are the advantages and disadvantages of renting your business premises?
There are several advantages to renting, mainly around the fact that it’s simpler in the short-term. You won’t need to spend much money when taking on a new lease, and very little information is required for approval, making it a relatively simple process.
Commercial leases generally don’t require a large initial deposit, meaning the cost of taking on a new property is low. This can be an advantage to smaller businesses.
Despite those advantages, there are a number of disadvantages to consider. Commercial leases are often quite long, meaning that you could be committed to the property for a long time. If your business outgrows the space, then you may find that you’re unable to grow due to your lease commitment.
Most leases require the tenant to undertake repair and refurbishment works as they’re required. This is an expense that you must incur, while not benefitting from any increases in the value of the property.
Finally, many leases have annual rent increases written into the contract, meaning you’re committing to an unknown amount of rent in the future. This can result in you paying out more rent than you’d like in the future while being tied in on your lease.
What are the advantages and disadvantages of buying your business premises?
When buying your premises, you are actually taking on an asset (the property), rather than a liability (a lease). Although many business owners will choose to finance their purchase, this will generally be paid down over time, leaving you with just the asset.
You can often fix your monthly payments, meaning you’ve got certainty of your costs going forward, which is often not the case with a lease.
When you’re the owner of the property, you’re able to make changes as you see fit, without the need to ask permission from your landlord. This may allow the property to grow or change in line with the evolution of your business.
When you take on a property which has more space than is required by your business, you can sublet part of the property. This will provide you with an additional income, which could be used to either pay down any borrowing more quickly or to invest further in either property or your business.
Finally, your property will generally increase in value over time, especially if you make improvements. This is often a very profitable move, with the increase in value far in excess of the cost of refurbishment.
When purchasing, you will have to lay out a lot more money than you would when leasing a property. This is often seen as the biggest disadvantage as most mortgage lenders will expect a deposit of around 25-30% of the property value.
In addition, you will also have other related costs such as stamp duty and legal expenses to consider.
How can commercial property purchases be financed?
These properties are generally funded using commercial mortgages. They work in much the same way as their residential counterparts, although commercial mortgage rates do tend to be slightly higher.
Rates between 2.6-6% are common, with lower rates generally being reserved for stronger applications, those for well established, profitable companies. Most lenders offer the choice of fixed or variable rates and will allow you to choose which option you feel is the best fit for you.
These mortgages are usually offered on a capital repayment basis, over a maximum term of 20 years.
How would buying my property help me financially in the long term?
As most commercial mortgages are arranged on a capital repayment basis, the loan is generally repaid in full at the end of the term.
This provides a great opportunity to either raise further capital. This could allow you to purchase other investment properties, or to rent out your existing property and move your business into a new one.
With the potential for growth in both the value and potential rental income of your property, you stand to make a solid profit on your property in the longer term.
When the time comes to sell your business and retire, you can choose to either rent out your commercial property or sell it and take a large cash lump sum.