The biggest question a small-business owner has to make before taking out a capital loan is "why am I buying this building?"
"If it's for the right reason, usually a case can be made for a loan," says Ed Hopson, senior partner and chief executive officer with Real Estate Capital Partners in Macedonia.
Once you've set your sights on a building, make sure buying the building makes good business sense in terms of net worth, cash flow and profitability.
Next, Hopson suggests getting an appraisal of the building, as well as property tax information to get an idea of the insurance cost.
"Make sure, dollar for dollar, it's worth what you are going to be investing into it," he advises. "More times than not, borrowers don't get an appraisal until the bank forces them to get one."
The next step is to gather the proper documentation. You need to determine who is going to be the borrowing entity — you or the corporation and make sure you have financial statements for the past three years for yourself or your business.
Before you meet with a lender, make sure you are aware of the building's operating costs and your cost of ownership. When you submit your application to a lender, they are going to make sure ownership makes sense for your business, Hopson says.
Your lender will also want to see cash reserves. If it costs $100,000 a year to make the loan payments, most lenders want to make sure the business is bringing in $150,000 to $200,000 a year.
"It also helps to have a tenant for your building," Hopson says. "That way, not only do you, the purchaser, have income coming in from your business, but also from rent. The bottom line is that you show lenders you can cover the debt."