05 Jul Small businesses can benefit from buying their own premises
Small and medium-sized business owners who are renting their premises should take advantage of current market conditions to consider buying, says Paragon Lending Solutions sales executive Marc Levitt, especially given the increasing likelihood of an interest rate hike in July.
“Whether or not to invest in your own premises is a major financial decision,” says Levitt. “On the one hand, by paying rent you’re investing in someone else’s asset; and if they hike the rent or sell the property your business could be in a very vulnerable position. So owning your own premises can reduce your risk, while also building a long-term asset. On the other hand, if you have free cash available, investing it back into your business will usually get you a better return than putting it into property.”
For this reason, says Levitt, the best candidates for buying their own premises are businesses who’ve already had to invest in fitting them out. He says restaurants, panel beaters and day care centres are typical examples: “They all have to invest in specialised finishes or fittings that can’t be taken with them if they move. In this kind of case, you’re investing to protect your ability to do business in the future, not just to earn a return”.
Bank loans are one of the most affordable ways to finance a property investment, says Levitt. “Banks are currently willing to offer loans of up to 80%, at very competitive interest rates, which is historically unusual,” he says. “So for those who have enough cash available for a deposit, this could be an excellent option.”
But, says Levitt, business owners can still consider buying their premises even if they don’t have enough cash to fund a deposit, or don’t want to tie up working capital. “There are 100% financing options, available usually with a mixture of loan and equity finance — which will probably mean looking beyond banks.”
One example is Business Partners, which offers a flexible mixture of loan and equity finance specifically tailored to established trading businesses who want to secure their premises.
Arnold February, Regional Investment Manager for Business Partners in Gauteng, says they will typically finance the entire purchase of an owner-occupied business premises by registering a new company to buy the property. Business Partners will own around 35% of the equity in the new company and the business owner will own the rest. “We give the business a loan at favourable rates to buy the property; then after ten years when the loan is repaid, or earlier if they wish, they can buy our shares and own the property fully in their own right.”
February says Business Partners bases its decision on the strength of the trading business, which must have been trading profitably for at least two years. “We look carefully at the financials, and if the business is able to carry the cost of servicing the loan, we will likely invest. This is a relatively easy assessment as the business is already paying a monthly rental that can now be used to pay the monthly loan instalment instead. This is a win-win proposition for us and the businesses we finance, and as a result it’s one of the most popular transactions we do. A business owner can go from renting to owning without putting down a cent as a deposit.”
These are just two of the alternative financing options available, says Levitt, “but there are many more. Business owners often don’t realise just how much variety and choice there is in the finance market. It’s always a good idea to seek advice from experienced professionals.”
Finally, says Levitt, any business that is considering trying to raise finance should prepare by making sure that all its financial affairs are in good order. “Transactions like these tend to happen fast; if things get held up for several weeks because you don’t have a tax clearance certificate, or up to date financials, the whole deal can fall through. But if a business has a solid trading foundation, is well managed and financially disciplined, it’s in an excellent position to take on an investment in its premises.”