What’s right for your business
When it comes to your premises, it’s important to weigh up what suits your business best – buying or leasing office space. And much of it will depend on what growth stage your business is in. In other words, what suits a business start-up may not be what’s best for one that’s experiencing a growth spurt.
There are several considerations to keep in mind, such as how many staff you have, whether or not your business is client-facing, if you manufacture your products onsite and if you need a lot of space for inventory and raw materials.
And then there’s also the option of not having a commercial premises at all. For example, if your business handles web content management for clients that are mostly based overseas (that is, clients you don’t actually see face to face) and your servers are in the cloud, then you and your employees could quite comfortably work from home, making it what’s called a ‘virtual business’. It’s certainly a big money-saver if the arrangement works for you.
In most cases though, businesses need premises from which to operate, so it’s important to consider the pros and cons of renting or buying.
Buy vs. lease – the pros and cons
Once you’ve clearly defined your business needs and you know what kind of space you’re looking for, it’s time to decide if you’re going to invest in some real estate or rent it.
Pros of buying / cons of leasing
- It’s a capital gain, which makes for a good asset. This is something banks look at when they’re lending. If you have your own premises, that makes for decent collateral. When you’re paying rent, this is seen only as an outgoing expense.
- You’re your own landlord, and you’ll have a tie to the building. This means you can make whatever changes you want to the building and you don’t have to worry about inspections. When you lease, you’re often at the whims of the landlord.
- It provides stability, especially if you’ve had to move frequently because of changes to rental properties. If you’re leasing, you could face being evicted if the landlord decides to sell, or to use the property for other purposes.
- If you have specialized equipment, the need for a complicated infrastructure or you retain a large amount of stock, having your own space is much easier. In a leased space, landlords may object to housing the equipment or stock you need.
- It’s an investment. The repayments you make on your mortgage will benefit you in the long run, while paying rent doesn’t.
Cons of buying / pros of leasing
- Buying is a commitment. Unless you’re sure you’re not going to be moving, downsizing or even closing down, renting is probably a better option.
- You’re responsible for all repairs, insurance, rates etc. If your cash flow’s not in a position to handle this as well as your mortgage repayments, you’re better off paying rent since that covers all the above.
- The cash you invested in the property could have been put to better use increasing your capacity in other areas. Leasing means no mortgage payments, which means you’ll have more available for cash reserves.
- You’re not at risk of the property being devalued as market prices fall. When you lease, that’s your landlord’s problem.
The decision also hinges on your cash flow situation. If you have money in the bank and you’re wondering what to invest it in, real estate is often a good option. However if your balance sheet’s looking a bit depressed, forking out for expensive commercial real estate would put un-necessary strain on your business finances.
Additional resources
At Meridian, we’re big on small business. Talk to us about our small business banking solutions and how we can help if you’re thinking of investing in real estate.
Talk to one of our Small Business Advisors. They’ll take the time to get to know you and your business, and can help tailor financial solutions that fit your needs.
