So, you’re a small business owner and you want to buy commercial property. That’s great! The benefits of commercial property ownership are numerous, and with withco, it’s now easier and more affordable than ever—you don’t even have to have the cash on hand for a down payment with our lease-to-own model.
However, once you’ve reached the end of your five-year withco lease, it will be time to seek financing for a mortgage (see our step-by-step guide to withco’s lease-to-own model). Our goal is to help our partners secure the best financing possible for their business, but we believe that some loan options are better than others in terms of the financial risk to small businesses. That said, it’s important to educate yourself on your options.
Below, we break down your small business mortgage options from best to highest risk.
SBA 504 Loan Program
This loan provided by the Small Business Administration was designed specifically to help small businesses finance the purchase or expansion of commercial property. It offers long-term, fixed rates that are aligned with favorable bond market rates. The main difference between a SBA loan and a conventional loan is that SBA loans are backed by the government, meaning that if your business were to fail, the SBA will cover a portion of your unpaid loan. Since SBA loans offer more financial protection for small business owners, most withco partners seek loans through the SBA. Read more about SBA 504 loans here.
Conventional bank loans are similar to SBA loans in that they provide lump-sum funding for small businesses—the main difference is that they do not have SBA protections. Since the bank shoulders 100% of the risk should you fail to make payments, they often require higher credit scores, making it more difficult to qualify without SBA backing. However, if your business has a Very Good credit score or higher and good financial standing, a conventional bank loan may be able to offer you a lower mortgage rate.
A loan from an alternative lender works similarly to a conventional bank loan, but the main differences lie in the actual source of financing and the qualification processes. Conventional bank loans typically come from traditional banks, while alternative financing lenders usually offer services exclusively online and have lower levels of qualification requirements (e.g. lower credit scores are permitted). However, this often means that their interest rates are higher than conventional and SBA loans, putting your business at higher risk of financial insecurity.
Alternative loans may be a good option if your business is in very good standing from a profit & loss perspective, but hasn’t been able to bring up its credit score. However, we recommend that small businesses first seek loans through the SBA and traditional banks before considering alternative lenders.
Business line of credit
Business lines of credit are a great option if you’re looking to make smaller updates or expansions to your property, but they should not be used to purchase property outright. The interest rates on lines of credit are significantly higher than business loan rates, and have much shorter terms.
Believe it or not, some people choose to purchase property with credit cards if they have a high enough credit limit to cover the cost. Of course, this comes with high risk of default since the credit card interest rates are typically very high (an average of 17%) with shorter terms. You also put your credit score at risk if the balance on your credit card is a high percentage of its overall credit limit. Ultimately, this is not a good choice of financing when it comes to purchasing property.
No matter what kind of lending you choose, withco will be your partner along the way to guide you.