There comes a time in every business owners life when it makes sense to purchase a building to operate out of. 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. As much of a milestone as this is, it can also be a stressful time for a company as there are so many options available and so many different things to learn in a short period of time. 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. If you are going to occupy more than 50% of the building, banks consider this owner occupied and want you to put in 20% of the purchase price. If you need to put less down, then you can get creative by either offering up additional collateral, such as your home or other business assets. Another good route is an SBA 504 loan program which allows you to put down 10% as opposed to 20%. This is a good option and there are other advantages, but as with any government entity, you are going to have more fees and more paperwork.

As far as rates go, you can typically qualify for lower rates than your typical 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. 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. Now, the way loans are priced is off the treasury rate. Typically, banks will offer between 2%-3% above the appropriate treasury rate. For example, lets say you are seeking a 5 year loan/20 year amortization for your commercial building purchase. Most banks will price that off of the 5 year treasury, so if that rate is 5% then you could expect a rate from 6.75%-8.00%.

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. 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. While you're in there, they will probably also try to cross-sell you some other services, such as merchant services, a payroll services, or wealth management.

All in all, the entire process can be pretty easy to work with. 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.

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