While the small-minded saying, "If it ain't broke, don't fix it," may apply to some personal and professional decisions, choosing to upgrade your space is one that could positively impact your small business, both in traffic and in revenue.
We're here to share when it might be time for your business to invest in a commercial renovation, what your loan options are, and insights from a local small business owner about their commercial renovation loan experience.
When is it time for a Commercial Renovation?
If the design of the building no longer works for you and your employees.
The ongoing pandemic and constantly changing technologies has shortened the lifespan of commercial buildings, forcing existing businesses to adapt. (One example being the death of the cubicle following the normalization of remote work.) Employee performance and team morale directly impact external sales and success. So, if your building structure is hindering that — whether it be a leaky roof or cramped break rooms — a remodel should be on the agenda.
If a renovation would attract new customers.
While it may seem counterintuitive to put money into an existing building when revenue is already low, investing in modernizing your facility will bring in more revenue in the long-run.
From a commercial storefront perspective, customers are buying your brand and your space as much as — if not more than — they are buying your products. A positive shopping experience is the deciding factor on if you are creating a happy and RETURNING customer. Examples of shopping experience improvements could be adding a drive-thru window for payments or an area for online sale pickup.
From a commercial real estate perspective, upgrading your property and property features would allow you to raise rent and eliminate frequent tenant turnover. Added amenities like new unit appliances, a gym, pay laundry, or meeting rooms tend to attract more potential leases.
If you would save money or benefit from enhanced efficiency.
Utilities can be a major monthly cost when it comes to running your commercial property, especially in older buildings. The benefits to efficiency improvements like LED lights and better insulation go beyond reduced utility spending. Your green innovations make you eligible for some grants and low interest loans, and create a marketing opportunity to a large value-driven customer base.
In addition to cheaper utility costs, adding features that allow you to do better business, more frequently will drive revenue. For example, adding an extra bay at an automotive shop, or outdoor patio at a restaurant.
What made you decide to renovate your commercial property?
We wanted to "restore a historical building, attract good tenants, and elevate the rent rate to comparable properties in [our area]."
— Kay Musech, Brandow Creative
Commercial Renovation Loan Options
When life gives you l(em)oans, there are different ways you can make lemonade. Your commercial renovation loan options will vary depending on your eligibility and buying intentions.
SBA 504 Loans
Best For: Large renovation projects and modernization of owner-occupied commercial property.
SBA 504 loans are geared towards existing companies that are trying to expand or modernize their facility without hurting their cash flow. Common projects you can use a 504 loan for are gut renovations or renovating a historic property.
Eligibility Requirements: When applying for an SBA 504 application, you should meet the following requirements:
- Make a down payment of at least 10% of the project's costs.
- Operate for-profit and do not exceed $15 million in net worth or $5 million of business income.
- Property you’re renovating must be at least 51% owner-occupied.
- Meet Small Business Administration's policy goals including job creation and sustainability requirements.
Borrow Amount and Terms: These loans work a little differently in that they are government-backed by an SBA-approved Certified Development Company (CDC). The CDC provides 40% of the loan, your lending bank provides 50%, and you provide the 10% down payment. Because of this, below market interest rates are fixed for the life of the loan and terms are set at 10, 20, or 25 years. While loan amounts are generally capped at $5 million, certain eligible projects may qualify for more than one 504 loan up to $5.5 million each.
Loan Uses: You can use the SBA 504 loan for the following types of commercial renovations:
- Constructing a new building
- Purchasing commercial real estate or an existing business
- Purchasing, leasing, and installing new equipment or fixtures
- Purchasing fixed assets (i.e. furniture)
- Community improvements like sidewalks and gutter cleanup (but no more than 5% of loan proceeds can be directed there)
- Exterior land improvements including landscaping, paving, and gardening
- Converting space (i.e. turning an old factory into lofts)
- Upgrading electrical, plumbing, or other part of facility
In many cases, you can also include soft costs such as delivery or installation in your 504 loan.
How has your business or revenue grown since the renovation?
"Once all the [spaces] in our building were filled, we have doubled the revenue."
— Tim Brandow, Brandow Creative
SBA 7(a) Loans
Best For: Small businesses that want to renovate and borrow for other reasons, such as operational costs, fixed assets, or business acquisition.
An SBA 7(a) loan is the most basic and popular loan for small businesses and start-ups. They are a general purpose solution that have longer terms and potentially lower down payments.
Eligibility Requirements: In order to secure a SBA 7(a) loan you would want to be able to:
- Make a down payment of at least 10% of the project's costs.
- Meet SBA's definition of a small business (no more than 1,500 employees and maximum of $41.5M in average annual receipts).
- Operate for-profit in the United States.
- Have reasonable owner equity and assets.
- Property you’re renovating must be at least 51% owner-occupied.
Borrow Amount and Terms: SBA 7(a) loans have a maximum loan size of $5 million and a repayment term of 10 years for equipment and renovation, or 25 years for building purchase. While the bank you are working with decides the final terms of your loan, the Small Business Administration sets a cap on interest rates. Oh, and don't forget the fees!
Loan Uses: SBA 7(a) loans encompass similar uses to the SBA 504 loan and more. Their flexibility allows you to use the funding for any of the following:
- Constructing a new building
- Purchasing commercial real estate or an existing business
- Purchasing, leasing, and installing new equipment or fixtures
- Purchasing fixed assets (i.e. furniture)
- Community improvements like sidewalks and gutter cleanup (but no more than 5% of loan proceeds can be directed there)
- Exterior land improvements including landscaping, paving, and gardening
- Converting space (i.e. turning an old factory into lofts)
- Upgrading electrical, plumbing, or other part of facility
- Paying designers and contractors
- Covering operating expenses like recruiting talent, hiring, marketing, product development and inventory
Business Lines of Credit
Best For: Small business owners who want to make small upgrades and renovations over an extended period of time.
While SBA loans are great for large renovations, business lines of credit are perfect for the smaller projects that you chip away at over time. The way it works is you gain access to a revolving sum of money that is replenished every time you pay down your balance. The best part? You can withdrawal the money as needed and you only pay interest on the the money you use.
Eligibility Requirements: Qualification requirements for business lines of credit vary from lender to lender. The main components they will take a look at are your business history and revenue, current debt schedule, personal credit score, and any collateral or assets.
Borrow Amount and Terms: Depending on your personal and business financials, business lines of credit can range from $1,000 to $1M or more. The terms for a line of credit are generally interest only with a floating interest rate, for a period of 12 months. The key to determining the borrow amount and terms is having a renovation plan and timeline prepared to see how much money is needed where. (Your lender will also appreciate the organization).
Loan Uses: Business or working capital lines of credit allow you the flexibility to use the money however you want, and whenever you want including:
- Paying designers and contractors
- Buying furniture, supplies, and materials
- Interior changes and upgrades (i.e. new appliances, flooring, etc.)
- Covering short-term expenses and curb appeal enhancements
Equipment Financing
Best For: Purchasing or leasing office equipment, or updating fixtures and furniture.
When thinking of equipment loans, you tend to conclude it covers costs only associated with manufacturing machinery for full-scale renovations; however this is not the case. Financing can be used for ANY new equipment or fixtures that go towards improving your commercial space including lighting, office desks and chairs, coffee machines, appliances, shelving, and furniture.
Eligibility Requirements: Equipment financing has more eligibility flexibility since the equipment you are borrowing for acts as security for the loan. So, if you are unable to pay back the loan, the lender can repossess and sell the equipment. With that said, our lenders will still look at your personal credit score, business credentials, equipment costs, and equipment purpose so that they can provide loan terms and rates best suited to your business needs.
Borrow Amount and Terms: Security Bank will consider financing up to 80% of the acquisition cost of new equipment, and up to 100% with additional collateral. Loans are then repaid with principal and interest payments — with fixed or variable interest rates — for a period up to 7 years. Cost and terms will vary depending on whether you opt for an equipment loan or an equipment lease. The main difference between the two is that leases will have lower monthly payments, but you don't own the equipment at the end.
Loan Uses: Equipment financing only covers costs associated with buying or leasing business equipment, fixtures, or vehicles.
Why Security Bank for your commercial renovation loan?
"Andy Schornack. He impressed us with his willingness to partner with us in our renovation adventures."
No matter the project size, a commercial renovation loan provides the financing needed to take your small business to the next level. Take that leap by downloading our Commercial Loan Checklist and talking with Andy or one of our experienced lenders today.
