Should you Buy or Lease Space for your Franchise?

Should you Buy or Lease Space for your Franchise?

Owning a franchise over your own small business has benefits – such as a successful business model already mapped out, resources available, and stability. But it still comes with many stresses that every small business owner faces. A franchise owner makes critical decisions about their business’ future day in and day out. Whether to buy or lease space for your business should not be one of those decisions weighing on a franchise owner.

With the 504 Loan from the Small Business Administration, buying space is within reach and has many benefits over leasing.

  • Leasing has a lower up-front cost but can cost significantly more over time. See our lease vs own scenario.
  • Monthly payments for leasing vs. owning are often very similar
  • With owning, you benefit from the building’s appreciation; with leasing, your landlord reaps the benefits
  • Owning your building gives you the opportunity to lease any unused space, lowering your occupancy costs
  • The equity you build from owning your building can provide a comfortable retirement
  • Owning your building has tax advantages

One of the biggest perks of owning your own space, is having the peace of mind of knowing that you have a secure home for your business and your occupancy costs will not increase or fluctuate over time.

TMC Financing Helps FASTSIGNS Oakland Buy Space for their Business

Linda Fong, the owner of FASTSIGNS Oakland, was able to purchase space for her business by utilizing the SBA 504 Program. Linda started her FASTSIGNS franchise with her husband in 1995. They were drawn to FASTSIGNS, a provider of visual communication solutions, because they were attracted to the idea of using their hands and creating products.

Linda Fong grew up in Oakland and is proud to call it home. However, the past few years Fong has seen major changes and knew she was at risk of getting priced out of her neighborhood. “People are discovering what a beautiful city Oakland is and they are flocking to this part of the Bay,” explains Fong. “I have seen rents double and even triple.”

Fong knew that to keep her business operating out of Oakland, she had to buy space. Linda contacted TMC Financing and successfully purchased two condo units in the Peralta District with only a 10% down payment.

“Having this building now gives me peace of mind. I can concentrate on growing my business instead of worrying about where I’m going to be down the road. The space is mine!” – Linda Fong, FASTSIGNS Oakland Owner

About the SBA 504 Program

The Small Business Administration (SBA) understands the uphill battles that business owners face. Conventional financing can be hard to come by and is not ideal for many franchise owners. The SBA has established affordable and accessible loan programs, such as the SBA 504 Loan to aid the growth of small businesses. For those looking to leave the leasing lifestyle behind and became a property owner,  the SBA 504 loan is the best way to accommodate this next step.

The 504 program helps business owners buy land or existing buildings, construct new facilities, renovate their space, or buy equipment. SBA 504 loans can cover any soft costs attached to those projects, too, like appraisals, architectural fees, and interest on additional loans required for construction.

The 504 Loan is a partnership between a conventional lender and a Certified Development Company (CDC), which is a nonprofit organization that administers the program on behalf of the SBA. The loan has three parts:

  • The first is a loan from a conventional lender for 50% of the total amount. You and that lender determine the amount and conditions of that loan, which becomes your first mortgage.
  • Your CDC facilitates a separate SBA loan of up to 40% of the total, up to $5 million (or $5.5 for manufacturing and energy efficient projects), at a fixed, below-market rate. This will be your second mortgage.
  • Then you, the borrower, contribute a 10% down payment. Certain types of facilities are classified as single-purpose properties by the SBA, such as hotels or car washes, and require a 15% down payment.

A 504 loan has a maturity of 10, 20 or 25 years and is fully amortized (so there will be no balloon payment at maturity). You can lease up to 49% of the space in a building you buy.

What Franchises are Eligible for an SBA Loan?

Most small businesses are eligible for a 504 Loan and this applies to franchises as well. You must be a for-profit business operating in the U.S. and occupy at least 51% of your acquired building. Your franchise must be listed in the SBA franchise directory, which currently includes over 2,500 brands.

Your CDC for Franchises Located in CA or NV

You can find out more about the 504 loan program for a real estate purchase for your franchise from one of TMC Financing’s 504 loan experts. TMC is an SBA Premier Certified Lender and has funded projects worth more than $9 billion across California and Nevada. We have worked with franchise owners and business leaders for over 35 years. TMC can help you find the financing that is best for your franchise and are happy to provide guidance through the whole loan process. Contact a TMC Financing Loan Expert.