Before Signing a Commercial Lease

Have you ever had that one space, building, or neighborhood that has never been available? The one that you always thought would be the perfect location for your nascent business idea? If you are reading this, it’s more likely than not. There are dozens of factors that impact whether a small business can be successful. Timing is one of the biggest. What if that dream space becomes available before the other pieces are in place?

My advice to you: stop, step back, and think.

The Risk of Signing Too Soon

It is more common than you might think for prospective borrowers to apply for business loans after they have already signed a long-term lease. Often, they have not had the chance to understand the full suite of things that need to be in place for an application to be approved and funded The reasons are understandable. The location might be great. The benefits offered by the landlord, such as an allowance for tenant improvements, might be generous. The monthly rent might also seem reasonable by area standards.

Why Timing Matters to Lenders

Coming to a lender with your small business and signed lease in hand can be cause for concern. This is particularly true if the timeline for a “move-in” date is weeks rather than months ahead.

Like many, lenders do not like to feel rushed to make a decision about whether to approve a loan application. Most lenders also have fairly standard timelines from application to approval. Those timelines may not be flexible due to internal controls, processes, and sequences that may not be fully visible to a prospective borrower.

What to do Before Signing

Some things to think about and look for while you navigate this process to ensure that you are not stuck with a lease with no business funding to back it up:

• Research, research, research. If you already have the inkling (or determination) to start a business, think ahead. If you know you will need outside funding to make the dream into reality, compile data on the lenders that serve your area. If their websites don’t note their typical application timelines from application to approval and funding, ask. Find out what typical commercial rents are for the areas (or particular building) you are interested in.
• Ask your lender (or anyone else in your circle who may be knowledgeable) about landlord allowances. Particularly if you plan on doing not-insignificant buildout or remodel of any space you might occupy. It is very common for landlords to provide landlord allowances, breaks on the rent, or similar support for businesses that renovate their spaces. The primary reason is that many improvements also add value to the space for the landlord themselves.
• Sketch out your timing. How much cash do you need of your own before funding is secured? Think about what it will take to secure a space, put down a deposit, make first month’s rent, and cover other early costs.
• Don’t be afraid to say no.

It’s Okay to Wait

If the perfect space opens up but the other pieces you need aren’t in place – think about the ramifications of saying yes. Even if you miss out on the “perfect” space, you can prepare yourself in the meantime to be ready when the next perfect space opens up.

Before signing a lease, take the time to understand what the space will cost, what your funding timeline looks like, and what needs to be in place before you move forward. Business Impact NW’s small business loans and free business coaching help business owners prepare, ask the right questions, and make informed decisions before taking on major commitments.