How To: Finance the physical growth of your business
Will Hatt
One of the most rewarding aspects of commercial lending is helping businesses grow into larger, more mature enterprises. For many new and up-and-coming businesses, the first step is simple: add more space. At some point, spare bedrooms and home kitchens and cramped offices not only inhibit capacity, but also limit a company's stature. Investing in a commercial property or renovation can help operational efficiency as well as increase brand awareness, which in turn can help legitimize a business and ultimately lead to more sales.
While financing physical growth can seem overwhelming, owners who do their homework and approach their lender with a comprehensive business plan are much more likely to secure financing for their expansion. With the demand for prime commercial real estate outstripping the supply in much of New England, lenders can afford to be choosy about the projects they finance.
The following are some areas to focus on when seeking to finance a commercial real estate purchase or renovation:
Develop a clear business plan
Lenders prefer projects with a plan that articulates objectives and potential contingencies. For example, new space also means new fixtures and equipment, which in turn may also mean higher energy consumption, taxes, insurance and likely added labor costs to utilize the new capacity. All of this should be offset by the anticipated increase in revenue and documented in your plan. Make this realistic so both you and your lender have a clear understanding of your financial picture post-expansion or renovation.
Keep collateral in mind
Lenders typically do not like to extend financing on a project if their lien would be subordinate to another lender, i.e. using a mortgaged property as collateral for a new purchase or renovation loan. If you do seek financing from a lender different from where your first mortgage is held, the new lender will most likely refinance the original mortgage as well. Given the current record low interest rate environment we see today, this may actually be advantageous.
Know the property condition
Especially for renovations, property condition and the extent of rehabilitation needed will have a major impact on the lender's decision to finance. If a property has significant deferred maintenance, you will need to provide a detailed plan, timeline and at least three cost estimates on what it will take to bring it back to 100%, especially if you will perform the work yourself. Some lenders may even require financial documentation for contractors to ensure they have the means to finish the job. These will need to be documented by a reputable and independent inspector prior to the appraisal and closing of your loan.
Sell them on you, the buyer
While collateral and property condition are important factors, lenders need evidence of your ability not only to manage debt, but also to manage a commercial property. Regular upkeep is required to prevent it from falling into disrepair, which could erode sales, damage your company's reputation and require costly yet preventable renovations. Document your property ownership history, with current photos if possible, accompanied by a current personal financial statement and at least three years of tax returns. Lenders also like to see three to six months' worth of available debt service.
Have skin in the game
Be prepared to put down at least 25% of the purchase price into the property in some form. This does not necessarily need to be all cash; combinations of equity and cash may also be acceptable. If approved, most lenders will offer terms for commercial real estate at 10 to 15 years, though some may go as long as 20 years.
Ultimately, the better you can demonstrate how growing your business physically will help it grow financially, the more confident lenders will be in your loan. Thorough research, planning and focus on the above areas will set you up for success — both in securing financing for your expansion and in the long run of your new enterprise.
Will Hatt, senior vice president and COO at Hampden-based CUSO Business Lending Solutions, can be reached at whatt@mainebls.com.
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