1. Invest in Real Estate or Production?

The first question to consider: Does it make better financial sense to buy a piece of real estate, or to invest that capital into a piece of machinery or equipment that will produce a higher return?

This is an issue that almost any small business owner must consider because most small business owners don''t have access to capital markets or other sources of equity. Their capital is borrowed, so there are many situations where it makes more sense to invest that capital into production rather than real estate.

2. Make Sure that the Real Estate is "in-synch" with Today's Market

The small business owner must be sure to purchase a piece of real estate that not only suits his/her own needs, but is also desirable in the current market and will be in the future.

The small business owner who's not aware of what's desirable and marketable, may be surprised to find that a lender may limit its advance against collateral value due to the type of facility being financed. Also, if a small business owner needs to sell the real estate unexpectedly in the future, there may be little or no market for that particular property. One must be careful not to purchase an obsolete facility.

3. Understand SBA (Small Business Association) & Industrial Development Authority Financing

These alternative mortgage-financing programs are available to those small business owners who may not qualify for conventional bank financing. Conventional financing may allow only 15-20 year mortgage, while with the SBA's involvement available terms could be stretched to 25 years.

For purchasers who are seeking a lower equity contribution, perhaps 10 percent vs. the standard 20 percent, and the lowest possible interest rates, Industrial Development Authority Financing may be an option.

The Pennsylvania Industrial Development Authority (PIDA) and the Pennsylvania Economic Development Finance Authority (PEDFA) offer such programs.

Full or near full owner-occupancy is almost always required. PIDA has a job creation pre-requisite and PEDFA is designed primarily for the high end of the market.
Nonetheless, these are desirable options available to conventional financing.

4. Shop Around and Compare Conventional Financing Options

There are always a variety of different options for small business owners can qualify for conventional financing. It pays to shop around.

5. Be Aware of Changing Market Conditions

This final tip is a word of warning : Are interest rates moving up or down? Should you be looking for a floating or fixed interest rate? Is there a pre-payment penalty? If interest rates are high and you expect them to move lower a full floating interest rate is for you. If interest rates are low but you expect them to rise, fix the rate. Some lenders offer caps (interest rate ceilings) and collars (interest rate floors and ceilings) for borrowers who want a floating rate with limits.