Funding Your New Location
If you dream about expanding your business, you’d better be spending your waking hours figuring out how to fund it. One popular route for entrepreneurs who want to open a second location is a loan from the Small Business Administration (SBA). These financing products come with interest rates and repayment terms similar to those you’d get from the best traditional bank loans.
The SBA is dedicated to helping underserved entrepreneurs, including women and minorities. If you’ve been rejected in the past and feel that you haven’t been given a fair shake, it’s definitely worth checking out the options this agency offers.
Other loans may also help provide funding for expenses related to your expansion. Possible options include term loans, short term loans, equipment financing, business line of credit, or a merchant cash advance.
There’s also a type of loan specifically designed for small business owners looking to expand their operations. Known as a commercial real estate loan (aka a commercial mortgage), it can be used for all manner of projects that might be tied to your business growth. Possible uses include:
- Renovating an existing business location
- Constructing a brand new building
- Opening new retail space
- Buying an existing warehouse
- Getting out of a lease in order to become a property owner
- Refinancing for an extension on your current payment term
Commercial real estate loans usually offer favorable rates and terms. For example, the rates start around 4.25%, and the repayment terms are about 20–25 years. The dollar amounts on these loans start around $250,000 and go all the way up to $5,000,000.
The reason these loans provide such borrower-friendly details largely comes down to collateral. The real estate involved with the loan will be used as collateral, which works wonders on lenders. Knowing their investment in your business is secured by such a tangible and valuable asset, they’ll be more generous and willing to work with you.
“When lenders demand collateral for a secured loan, they are seeking to minimize the risks of extending credit,” explains BizFilings. “In order to ensure that the particular collateral provides appropriate security, the lender will want to match the type of collateral with the loan being made.”
Be aware that in situations where the value of the asset isn’t clear to a lender, they may ask you to provide an alternate form of collateral. This way, they’ll still feel secure in the loan and will be able to proceed with confidence.
In addition to reviewing your collateral, the lender will look at other factors to determine the interest rate and repayment term you might qualify for. Here are some of the most important things they’ll consider:
- Your credit score: Lenders will look at your financial track record to get an idea of how likely you are to make regular payments on the money you borrow. Your credit score is one of the most important aspects of your financial history, as it reveals crucial payment history details. Commercial real estate loans often involve large sums of money, so you can plan on lenders giving these details a close inspection.
- Risks involved: Because real estate projects are notoriously unpredictable, lenders will do everything in their power to understand the nuances of your project before loaning you the money you’ve requested. If you are purchasing an existing structure or doing a new build in a safe area, there probably won’t be major issues. But if you decide, for example, to renovate a dilapidated pickle factory for your second business location, lenders will be understandably apprehensive when it comes to providing the funds.
- Size and term of the loan: Larger loans typically have higher interest rates to compensate for the higher risk posed to the lender. If you have a shorter repayment term, lenders will also consider a high interest rate. This is because shorter terms include fewer payments, which is where a lender makes their money.
- The economy: If the economy is humming, you may find that interest rates are higher. On the flip side, rates often go much lower during economic downturns. While you can’t control the national and global financial systems, you can control when you borrow money. For this reason, many small business owners try to take out loans more often when interest rates are pulled down by economic factors.
- Variety of interest rate: Since real commercial estate projects vary in so many ways, lenders use a handful of different types of interest rates depending on what the project entails. A loan-to-value ratio compares your loan amount with the property value. An after-repair value ratio is used for renovations or repairs and accounts for the rise in value at the completion of the work. Fixed rates are locked for the duration of the project, so you won’t need to worry about fluctuations in the economy or other external forces. Variable rates, on the other hand, are able to change based on market conditions. The rates may reset monthly or as sporadically as every 5 years.
Finding the Best Loan for Your Real Estate Needs
Don’t assume that a commercial real estate loan is the only way to fund your second business location. You have numerous financing options. The key is to review the relevant financing products and choose the one that gets you the money you need, the timeline you require, and the rate you prefer.
“While there are numerous options from which to choose, not all deliver the same benefits,” explains Tom Coletta, a senior vice president at Axiom Bank. “Make a short list of potential lenders by shopping around to compare offers.”
Many resources are available to help you evaluate loans and make an educated decision. One of the first places to start is a trustworthy loan calculator, which allows you to identify costs in a clear and efficient way.
You also might want to talk to a financial expert who can help you identify desirable loans and watch out for red flags. This can be critical because some lenders use inconsistent terminology or hide fees in their disclosures. These frustrating practices can muddy the water, making it even more beneficial to lean on an experienced guide who can point you in the right direction and prepare you to make a confident decision.
Regardless of whether your second business location is a restaurant, retail store, warehouse, office, or something else entirely, your preparation is key. By taking the time to choose the best location and secure the most favorable funding, you’ll be setting yourself up for a much brighter future.