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.

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 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.

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. 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. The most common terms are 5 year fixed rate balloon with a 20 year amortization. As more and more banks enter the market, it has forced lending institutions to offer more flexible rates to its commercial clients. This includes fixed rates as long as 10 years and amortization as long as 25 years. This is good news for the borrower. 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%.

After you've had initial talks with the bank, you'll need to get prepared for loan approval. Typically, they will ask you for your last 3 years of business financial statements of all related companies. 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. 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. Obtaining a commercial mortgage, while time consuming, can also be the easiest to get. You have strong collateral in the building and you can also can justify the cost because you are eliminating an expense (rent) and just replacing it with the mortgage payment. 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.