You can generally get an ordinary term loan from a formal lender for buying a business property. A term loan is simple: You borrow money and agree to pay this back with interest at a set monthly amount for a set period of time. In general the follow principles apply to a term loan:
You will be expected to put down a deposit equal to a percentage of the cost of the property. The percentage can vary from 25% to 50% so make sure you visit a couple of lenders to find out their requirements.
Provided the building you wish to purchase is in good condition and can be used by any number of businesses, you may not need to worry about providing collateral. Most lenders will use the property itself as collateral. This means that until such time as the loan is repaid, the property belongs to the bank rather than to you.
Expect your business credit rating to be checked. Often lenders will also check the personal credit rating of the business owners.
Although most term loans are for 60 months, building finance tends to be for a longer period, often from 5 to 10 years.
Other costs you will need to consider when dealing with a term loan is that you will get charged a once-off administration fee – the “origination fee”, as well as a small monthly admin fee (in most cases) and a deposit that is usually between 25% and 50% of the property value.
Lenders offer a range of benefits, so make sure you check to see whether your lender offers any of these benefits:
Some lenders allow a business a little grace before starting to pay back a loan - 2 to 3 months generally. The interest on the loan will be added to the principal amount over the grace period, so make sure you check how this will impact on the total amount you have to repay.
If you find that you are going through a particularly bad patch, you can arrange for a payment holiday. In this case, the lender could give you 2 to 3 months break from making repayments. It will be easier to negotiate this if you can prove that the cash crunch wasn't due to bad management. It will also cost you money, so be sure to check the overall cost implications.
In the world of agriculture, it's common that farmers repay their loans in 2 instalments during the year. This allows the farmer to cash in on his/her winter and summer harvests, before he/she has to pay back the lender. Even if you're not a farmer, the principle applies. Lenders are often willing to design the instalment period according to the patterns of whatever business you're in. This might mean making instalments twice a year, or even 4 times a year.
Some lenders offer both equity and loan finance (or a combination of the 2). They may be willing to convert a loan to equity in the event that your business goes through a cash crunch, and is struggling to pay back the loan. Obviously they need to believe that your business will get through the crunch and that their equity investment will be worth money in the long run.
With some term loan products, extra money paid by the business, above and beyond the monthly instalment, can be withdrawn again when the business needs it. However, rules apply and you have to stick to them, such as a minimum amount that can be withdrawn. Alternatively, some lenders will allow you to extend your loan as soon as you've paid off a certain portion of it (usually a quarter of the loan). This saves you from having to fill out another application form, but it doesn't mean that you can simply withdraw money whenever you feel like it. You'll still have to put in a formal application; it's just quicker than the original application process that you had to go through.
If you think that a rise in interest rates will damage your business - ask for a fixed rate. However, bear in mind that you won't benefit if the interest rate drops!
Finfind provides its services free of charge to businesses seeking finance. Our primary purpose is to link SMEs with all the relevant finance providers and finance products that match their funding needs. As a matching service we are not required to be a registered finance provider as we do not loan money directly.