Unless the new small business owner has access to a sizable sum of money, most will meet with a lending institution to secure start-up capital. Even sole proprietors face some costs in paying license fees, buying inventory supplies, and advertising one’s products or services. Working out of one’s home reduces some costs. However, not every business can be conducted out of one’s home. Decisions about the size of office space, furniture, equipment, and inventory raise the question of whether one takes out a loan or leases need to be resolved before opening the doors.
A lease is a written contract between the owner and the person who wants to use the property. Property can be used to mean an actual geographical area such as a small plant or office space. Property can also mean equipment such as a computer or copier machine. In some cases, the property can also mean a concept or idea. This last instance is rare so for purposes of discussion property will refer to location or equipment.
Leasing offers many advantages. If the new owner has a less than perfect credit rating, then obtaining a lease is usually easier than getting a loan. Obviously less capital is required at the outset in order to open your doors. One hidden advantage is that leases are a tax deduction. If you lessees can negotiate a payment plan to meet their needs instead of a fixed repayment schedule as required by loans.
There are of course some disadvantages to leasing equipment. While leases can be a tax deduction used under operating costs, the lessee loses tax advantages on the depreciation of equipment. While the monthly payment for office space is usually, lower than purchasing it outright, the overall cost advantage may be lost during the lifetime of the lease. For example, a new business owner anxious to secure a prime location signs a ten-year lease. And, if the owner does not read the fine print, a fine may be imposed for ending the lease before the end of ten years.
Real estate leases require an understanding of terms. Getting an expert to review the terms of any lease agreement is advisable. Further, it is standard practice to negotiate the terms of a lease. Study the real estate market for commercial property to determine property conditions, crime rate, and business turnover. The owner of a small boutique who signs a five-year lease does not want to learn that the landlord will lease the adjacent space to a retail shop specializing in discount items.
If leasing is the selected option, be certain that the lease agreement contains certain clauses. If you are willing to assume a short-term lease, then be certain that a sublet clause is included. If you decide to move your business, you can do so with minimum bother. The bailout clause is typically used when an act of God or an unforeseen event occurs within your business area. This allows you to vacate the lease without penalty. Beware of the recapture clause. Once the monthly payment schedule is determined, the landlord can still evict an owner if he can demonstrate that the owner is not doing sufficient business to pay the rent.
Business owners who lease space for conducting business or manufacturing a product for distribution have choices. Begin with a needs assessment. Discuss your plans with both your financial advisor and legal counsel. Have a qualified representative review any lease before signing it.
