When asked the question, “Should I buy my location or lease it?” The answer is, it depends. This is where a solid business plan comes into play because in order to answer that question there are a number of factors that impact the answer.
- What do you do to generate revenue?
- How much capital does your business require?
- How long have you been in business?
- Is this the only location your company will have?
- What is your cash position?
- What are your plans for growth?
Here are two scenarios that help answer the question of whether your business should buy or lease:
- A company is looking into moving a business in the area that will have 6 locations. They are finding that people who own land in the areas suitable for business only want to lease property to them. The willingness to sale the property is not there and even if it was the price would absorb too much capital due to the price it would take to get the land owner to consider selling. As you can imagine, this has had an impact on the thought process of this company that is looking for the locations. Instead of purchasing the first location, looks like leasing may be the best option for now.
- A company started back in 2009 and required a significant amount of capital to get started. At the onset of starting their company they leased with an option to purchase at a later date. From 2009 to 2012, they leased. In 2013, the company was performing to expectations and they decided to exercise their option to purchase the property. The decision was impacted because the company wanted to grow and make significant improvements to the property. The other driving factor was having the property as an investment.
In the first example, coming to an agreement for an intermediate lease for about 7 years with options to extend for another time period and a purchasing option would be an excellent solution. This will give you time to get the business model up and running to generate a stable source of cash flow. It would also give you the ability to fix your cost as much as possible and the lease would generate tax savings as it could be deductible.
In the second example, the initial lease was entered into by the company with expansion in mind. This has turned out to be a great benefit to the company. They have been able to expand and it has turned out to be an excellent investment.
- No equity down payment
- Repairs are handled by landlord
- Short term and intermediate options
- Investing in property
- Save money over the long term
- Flexible for expansion, could lease excess space
In summary, if you plan to stay in your business for more than 7 years then leasing makes sense. Make sure that you have reliable partners to help you make these decisions.
-Tony A., Market Manager, Commercial Banking