Real Estate Can Provide Collateral to Secure Financing

Pride of ownership can lead to business failure if too much capital is tied up in real estate or other fixed assets. Many business owners avoid large real estate investments by renting or leasing their facilities. Other small businesses that own their own buildings, land or equipment can turn equity into cash by mortgaging the property to the bank, commercial finance company, savings and loan organization or insurance company.

Real Estate loans on commercial or industrial property are usually available for up to 75 percent of the property’s appraised value. Repayment, usually monthly, is amortized over 10 to 25 years, with payments completely covering the loan by the end of the loan period. Shorter payment periods or balloon payments can sometimes be arranged. If needed it is often possible to obtain a second mortgage on the owner’s remaining equity in the property. Interest rates are typically higher than those for the first mortgage.

If the value of the property has increased since it was first financed, it may be possible to refinance by taking out a new mortgage. The old mortgage is paid off from the new, and the borrower receives the difference. But business owners should use this method only when it is absolutely necessary—if the cash is needed for business expansion, for example. It is advisable not to risk real estate if the business is in a weak position within the market. When you offer real estate as collateral, you should have a solid business position. The real estate is simply the asset that leverages your business for growth through the liquid cash gained through financing.

Prudent business owners will carefully consider whether to borrow on their equipment to finance ongoing operations or expansion. This step enables owners to utilize capital for these purposes. Lenders will generally finance 60-80 percent of the value of purchase price of capital goods. The balance represents the borrower’s down payment on a new purchase or the amount of equity the firm retains in its own equipment. Such loans are generally repaid in installments over one to five years. A business plan that covers expansion is an important element in obtaining such credit, because the plan defines the business owner’s objectives in achieving success.

SCORE is comprised of more than 12,000 volunteer business counselors. All small business counseling is provided at no charge. Local SCORE chapters also offer small business workshops and seminars, which do charge modest fees.

Since 1964, SCORE has provided counseling to more than 3.5 million Americans. To find out more about SCORE and request a referral to the SCORE chapter nearest you, call 1 (800) 634-0245. Be sure to ask for a free copy of the brochure "No One Knows More About Small Business Ownership."

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