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. This can be an exciting and worrysome time for a company. In many cases, this is the biggest foray into small business financing that the company will undertake, so it's not unusual that there would be some jitters.

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%. This is a good option and there are other advantages, but as with any government entity, you are going to have more costs and more paperwork.

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 loan 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. 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. Now, the way loans are priced is off the treasury rate. Typically, banks will offer between 2%-3% above the appropriate treasury rate. 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.

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. 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 do your homework and come prepared, it can be a very easy and pleasant experience for you and your company.