Should a Small to Medium Enterprise (SME) own or rent its own premises?
December 6th, 2010 | Accounting News, Financial Planning News, Legal News, Small Business News
The challenge of deciding between buying and renting your business premises is one that faces many small business owners. Since this is one of the biggest financial decisions you will make, it is important to take into consideration the advantages and disadvantages of each and to decide which option will be most beneficial for you and your business. It is important that you make this decision before searching for a property; in order to streamline your search in sourcing an appropriate location and to be clear on exactly what kind of property you want your business to be located in.
Whether you are looking for a property to start a new business or simply relocating an existing business you should consider the following when making this important decision:
- Take into account the cash flow of your business in order to determine the appropriately priced premises
- Strategic fit, ie how well a business fits in with its external environment and includes such things as location, client base and how your environment can be of benefit to you. Consider the economic and demographic characteristics in the area
- How will you most effectively use the property?
- What return do you expect to get out of the property?
- What equipment will be required for the day to day running of the business? Consider whether you have enough capital to afford this and the investment in premises, if not attempt to find a cheaper premises or one that has equipment already on site
- The period of time you expect your business to be situated there
|If mortgage loans are used to finance the purchase it can potentially be as cheap as renting.||Your business will be locked into an expensive secured loan which you will have to pay back completely, along with interest.|
|The interest on the mortgage is tax deductible.||To secure finances to purchase the property you may initially need a large amount of capital.|
|You can make changes to the building without having to get permission from the landlord.||Owning a property generally ties up capital which could be better invested somewhere else within the business.|
|There are tax concessions for the capital costs and maintenance expenses for the building.||You will likely be tied into the one location and if the market isn’t there or the area changes it will be more difficult to relocate.|
|If you decide to move/close down your business, you will still own the property and can always rent it out or sell it to someone else to generate capital. The property is an asset to your business.||You will be responsible for maintaining the property.|
An alternative to buying business premises is to rent. While it is not a long term financial investment for your business, it still has its own potential benefits and should be taken into equal consideration.
|The asset is not your own therefore you don’t run the risk of it possibly being a depreciating asset.||The amount of rent due each week can change yearly.|
|As a tenant you will likely not be responsible for property tax or fire insurance and will generally not be liable for maintenance and repairs.||As a tenant you are not guaranteed a lease extension and may have to move out at the end of the agreement. The landlord can decide to move in, change tenants or sell the premises. This can then result in disruption and possible loss of customer base.|
|Nil or minimal capital is required.||Money injected into the property is essentially lost since you do not have an investment in the property.|
|If the premise becomes unsuitable or you are seeking a more strategic fit, you are free to leave once the lease expires.||The landlord must approve all changes made to the premises.|
|Your rent will be a tax deduction as a business expense.|
When deciding whether you would like to rent or buy it is imperative that you carefully consider the advantages and disadvantages of both buying and renting a property; as well as determining what the best option for your business is at the current time. Here at The Quinn Group our experienced team of Financial Planners, Accountants and Lawyers can assist you with advice about whether owning or renting your own premises is right for your business, contact Peter Quinn by submitting an online enquiry or calling us on +61 2 9580 9166 to book an obligation free appointment.
The information in this document does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it. It is important that your personal circumstances are taken into account before making any financial decision and it is recommended that you seek assistance from your financial adviser.