The first decision you need to make is whether you should lease or buy a premise, which is often an ongoing dilemma for many business owners. When a business commences operation, it’s important to concentrate on cash flow, and wise to not outlay unnecessary capital until the business is established.
There are a number of considerations, drawbacks, and benefits when deciding whether to lease or buy a premise. The starting point (besides the considerations detailed below) could be to seek advice from an accountant to model the costs of purchasing a premise and compare this to leasing costs.
But, let’s take a look at the fundamental needs of the business which must be assessed first:
- Floor space: the cost per square metre can affect the affordability of purchasing the premises. It may be more cost effective to lease the space. Licenses, permits, and allowable use also need to be factored in.
- Visibility: Better-placed premises in a suburb can cost more to purchase than to lease, in which case leasing may be better.
- Signage: This is important for products and service businesses alike.
- Parking: It is very important to have parking available for clients. Clients are required to come to the business, rather than the business coming to them. Restaurants, cafés, and hotels (to name a few) tend to list access (parking and wheelchair access) near the top of their priority list. Access, especially with consideration of anti-discrimination laws, is important.
- Location: With the internet, location is becoming less important. The suitability of the environment and the demographic of the business’ clients can lead to the decision being made for the owner, depending on affordability, so that they can be situated in an appropriate location. Proximity of suppliers, distributors, and clients, as well as complementary services offered by other businesses, all also play their role
- Budget: The bottom line; having the borrowing capacity, the deposit, and the ability to borrow based on tax returns or income will ultimately determine the options a business has.
Purchasing a separate commercial property is a matter of comparing the cost to rent your own premises vs the cost of having a mortgage against an owned property. Consider the location, as well as the opportunity cost with respect to whether there is a better location where you could purchase a commercial property for investment, and whether rental income from another premises could earn you, or save you, more money than purchasing your own premises (also consider the growth on the property in that location).
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Owning an asset, which can grow to provide a nest egg, is the most obvious benefit. Wealth, therefore, can be increased on two fronts rather than just one. The first comes from goodwill (reputation and client base), and the other is having a tangible, growing-in-value asset.
The growing equity in the property is effectively, in itself, a separate business. This can then be accessed to provide capital for expansion, working capital, and for weathering any storm that may come the business’ way.
Fitting out a leased premises to operate a business can be easier than fitting out a leased residential dwelling, particularly from a permission perspective. But, there is more freedom if you own the premises.
A financial planner can advise whether it is considered appropriate to purchase the premises with a self-managed superfund (SMSF), or if an SMSF is even worth setting up in the first instance.
It is arguable as to whether the loan repayments incurred from purchasing the premises puts the business owner into a more exposed position. If interest rates were to rise, it could eat into cash flow. However, rent rises by the landlord could have the same result.
Often, with a commercial property, all outgoings are paid by the tenant, so certain costs that are typically associated with owning a residential property can be lumped onto the tenant. So, buying a premises does not necessarily adversely affect the business.
There are tax consequences that need to be considered, even when running a business from home. If a person claims part of their home loan as a business expense, it could undermine the capital gains tax exemption on part of the house.
It depends on a number of factors as to whether a business can, should, or must buy the premises. There is always the underlying benefit of owning an asset; this can benefit everyone, but it must not be undertaken if it could be to the detriment of the solvency and growth of the business.
Whether it is a lease or purchase contract that is signed, it is always wise to seek legal advice.
To determine whether you’re able to purchase the property and maintain the business may well also require accounting advice, but bear in mind that even with the advice to buy or lease, it is the business owner that must determine if all the considerations above are congruent with the decision. These considerations can be more important than the advice.