Nearly every type of business needs a premise from which to operate – In the case of a small business it may be possible to work from home however as most things do eventually grow and expand, it may be necessary to obtain larger working facilities.
The majority of businesses will require their own premises and are generally faced with the option of either renting or buying. The obvious choice for many would be to buy, finance allowing however there are advantages and disadvantages to both sides.
Advantages Of Buying
Retention of ownership – most businesses will need to take out a loan in order to purchase property. In the case of taking out a mortgage, the business is able to raise the capital without resorting to selling a share in the company, either to an interested party or by way of issuing shares. In this case the original owners will have retention of both ownership and control. The mortgage lender will have the right to charge interest on the loan amount outstanding however it will have no interest to a share in the business or its profits. The lender has an interest solely in the property and is only permitted to call in the loan in the event of borrower default.
Taxation – Businesses are permitted to make mortgage interest payments with pre-tax money that is deductible for tax purposes as expenses.
Cost and cash flow management – A commercial mortgage allows a business access to finance that would not usually be available. They can offer a degree of flexibility in designing a repayment scheme to suit the needs of the business, which may include fixing the repayments for a set period of time. Mortgage repayments tend to work out lower than rental payments and the borrower in this case will know what the payments will be in advance – this fixed payment can often aid the business with cash flow and managing costs. Businesses that rent a premise can be exposed to market conditions which could result in payment fluctuations on review.
Security of tenure – Businesses and individuals that rent have very few guarantees beyond the end of the current agreement.
Asset appreciation – This of course is by no means guaranteed however property has long been viewed by many as a very sound investment. The business or individual will have an asset which can potentially grow in value, just like residential property – this could subsequently increase the value of the business.
Financial flexibility – Taking out a loan by way of a mortgage to buy a business premises can free up money held in the business for other purposes. Borrowing money outside of a mortgage could prove to be more costly. It may also be possible to remortgage in order to raise finance in the future by using the available equity.
Retirement – Many people decide to hold property in a pension plan which can offer a tax-efficient way of buying the premises and boosting pension benefits.
Disadvantages Of Buying
Financial difficulty – Like any other mortgage, the mortgage lender will hold a legal charge over the property. Nearly all businesses meet financial difficulties at some stage which could potentially result in mortgage payments being missed. In the event of default the lender may take steps to repossess the property – if this happens then it would leave the business with nowhere to operate from.
Relocation – In the event a business needs to relocate, it is relatively easy to terminate a rental agreement. In the case of an owner occupier, the process is of course far more complex.
Flexibility – A business that rents has a far greater amount of flexibility that a business that is tied to a mortgage. Buying would only make sense if the business is confident over its future which encompasses two main factors – relocation & business expansion.
Drain on Capital – When it comes to getting a deposit, this can mean a huge drain on the business capital as this is usually taken from the profits or reserves.
Maintenance and upkeep – The owner of a property has management responsibilities that a tenant would not usually have – maintenance and upkeep of a property is a constant process and can prove to be very expensive.