When should small business purchase property over renting?
Having fixed assets in property can help a business in the long term, but switching from rented property to buying it is not always the right step.
For start-ups especially, there are a diverse range of positives and negatives that can accompany such a decision.
It remains important to consider the financial position of a business, its cash flow and long term aspirations before deciding if purchasing is right for a company.
A number of positive aspects comes with owning a business property, as assets will often appreciate in value, meaning it’s possible to get a return on the property if the firm is there for long enough.
Of course there is no guarantee that the property market will remain stable, but investing into property is essentially investing back into a business.
It also means fixed overhead costs and owning a property brings the added incentive of sub-letting, if there is space, potentially meaning extra income for the business.
However, while all of these perks can support a business, it doesn’t always mean that purchasing property is the right move.
If a business has volatile cash flow for example, covering the deposit needed to purchase a property could place the longevity of the business at risk, especially should sales slow at any point.
Checking cash flow projects is therefore essential and potential sources of finance should be checked prior to any decision – undertaking an independent business review may highlight potential opportunities or stumbling blocks to a move.
Long-term practicalities need to be considered too, as there is little point in purchasing a property if a business will outgrow it quickly, or of the location is far from ideal.
A property can also be used a valuable asset in the event of a company being liquidated, as it can be sold off for the benefit of creditors if required.
There are other financial considerations to take into account when purchasing a property too, as maintenance, security and other management issues become the responsibility of the business, rather than the landlord as is the case with a rental property.
This can place further pressure on cash flows if not budgeted for when purchasing. While purchasing does have its advantages, it’s important for a business to be a secure position before making such a decision.
By Phil Smith