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When obtaining a business opportunity loan, borrowers will discover that many lenders simply do not provide business loans that do not include real estate as part of the business purchase. There are several other important business financing issues to consider before purchasing a business without commercial property.
Interest in buying business opportunity investments has picked up due to serious problems with residential real estate. However, because there are so many critical differences between residential real estate financing and commercial financing, it is important that prospective business owners educate themselves before proceeding.
To buy a business, a commercial borrower is likely to need business financing. If the business includes commercial real estate, the borrower will need a commercial mortgage. If the business purchase does not involve real estate, the business borrower must use a business opportunity loan.
Unfortunately, the availability of commercial opportunity financing is more restricted than commercial real estate financing. There are also some limitations and potential problems unique to a business opportunity loan, and business borrowers should do everything possible to avoid these business financial pitfalls.
Our goal here is to focus on various financial issues you should anticipate when commercial real estate is not part of the business purchase. Our suggested approach to financing business opportunities is provided below.
Begin your business opportunity investment financing plans by formulating a realistic assessment of the cash available for a down payment and the desired maximum business purchase price. A down payment of around 25% is suggested for most of the business financing situations described here. Seller financing is generally allowed for a portion of the down payment, but a prospective buyer should generally plan to invest at least 10% of the purchase price from their own funds, even if the seller provides 15% or more.
Because Small Business Administration loans are essential for this type of financing, you should explore whether you’ll actually be able to qualify for these specialized business loans. This step is important and somewhat complicated, and the involvement of an SBA loan expert is highly recommended. Among the issues to explore are whether collateral is available for SBA financing and how important refinancing is to the overall process of financing your business opportunity.
It is important to consider the lease terms that are possible. As noted above, investing in and financing commercial opportunities does not involve the purchase of commercial real estate, so arrangements must be made for a long-term lease. The length of the lease is important because normal business finance terms will restrict the length of business financing to the period covered by the lease (although you should anticipate a maximum of ten years for business investment loans). In other words, with a seven-year lease, the business loan is likely to be for seven years, and even with a fifteen-year lease, the business financing will likely be due in ten years.
Explore whether or not listing real estate is a viable option for buying a business. With the inclusion of commercial property, you can get a longer commercial loan and the interest rate will be lower. Because the absence of a commercial mortgage can actually be an advantage, the best possible terms when including real estate should not be considered in isolation.
Discuss business financing options with a business opportunity lending expert before making any offer to purchase a business investment. These discussions should include topics such as potential purchase price, down payment possibilities, seller financing, buyer credit scores, tax reporting requirements, and warranty options.