Buying a place for a business (commercial premises) has the advantage of having a tangible asset that we could take as a long-term investment; but the disadvantage of having to make a high initial investment.
While renting a premises has the advantage of considerably reducing the initial investment, and minimizing the risk; the disadvantage of having to permanently pay a high amount as rent for an asset that will never be ours.
Buying a premises would seem to be the best option, but, unless we have enough capital or financing capacity to buy one, renting is a good alternative.
Typically in the case of a single entrepreneur or a small business, buying a location is out of reach.
In this article we help you decide whether to rent or buy a premises for your business, we give you some advice that you should take before signing the rental contract for a premises, and we give you some guidelines for renting a premises in a shopping center.
Rent or buy a premises?
The decision to rent or buy a location for a business depends on several factors, but mainly on the capital or financing capacity you have.
Buying premises allows us to possess a tangible asset that we could take as a long-term investment, being able to sell it at any time (for example, in case the business does not prosper), as well as having greater control over the premises (for example, to be able to do all the remodeling we want); but it has the disadvantage of requiring a high initial investment.
While renting premises allows us to considerably reduce the initial investment and, in case the business fails, also reduce losses (it allows us to minimize investment and risk); it has the disadvantage of having to constantly and permanently pay a high amount as rent, in addition to the possibility of having to respond for the entire period of the rental contract in case we decide to close the business earlier.
If, for example, the premises are rented for three years, and the business fails in the first year, we will be obliged to pay the remaining months, find a third party to sublease the premises, or convince the owner to allow us to terminate the contract. rental (although we could avoid this when drafting the contract, where we must ensure that the terms or clauses are favorable, not only for the owner of the premises but also for us).
If we do not have enough capital to buy premises or we do not want to invest our capital in it, to decide whether to buy premises through financing or rent it, we must calculate the total investment of the business, both in the scenario where the premises are purchased and where it is only rented, then make a projection of the future income and expenses of the business, and then, based on this, analyze if we would be able to pay monthly the debt contracted as a consequence. of the purchase of the premises, or if we would only be able to pay the rent.
If we choose to request a loan to purchase a property, unless we have a good line of credit, the bank usually asks us to pay at least 25% of the total amount required; However, the monthly rental payment is usually one of the largest costs in a business, so the ideal would be to buy the premises.
However, if we do not have enough capital to buy premises or we are not able to obtain the necessary financing to do so, renting it is a good alternative, since in addition to the advantages I have mentioned, in this case, We would only have to worry about obtaining the capital or financing necessary to remodel and equip it.
Tips for signing the rental contract for a premises
A premises rental or lease agreement is a contract that a person (lessee) signs together with the owner or proprietor of a premises (lessor) when renting or leasing the premises for the operation of their business.
A premises rental contract establishes, among other things, the basic data of the parties signing the contract (tenant and lessor), the term or duration of the contract (the rent), and the monthly amount (the rent) that will be paid for the rent.
Below we give you some tips that you should take before signing a rental or lease contract for premises:
Contract period
The duration of a rental contract for a premises usually varies according to different factors such as the location of the premises, its size, and the type of business that is expected to be set up there.
A short-term rental contract allows you to minimize the risk since you would not be obliged to continue paying the rent in case the business does not prosper; but, on the other hand, it could be a disadvantage in case the business prospers, and the owner of the premises decides to retake his premises or increase the rental price (for example, if he sees that you are having a good flow of customers).
While signing a long-term contract (long-term) ensures that you do not have to vacate the premises so quickly in case the business prospers, and the owner does not want to renew the contract; but, on the other hand, it could be a disadvantage in case the business does not prosper, and you have to continue paying rent.
In general, it is recommended that, if you have a small or medium-sized business, you sign a renewable two-year contract at least, and to avoid having to continue paying the rent in case your business does not prosper, you include a clause in the contract that allows you to sublease the premises or sell the business to a third party.
Amount payable
The amount to pay for renting a premises is usually a fixed amount that must be paid monthly; However, in some cases (for example, in some shopping centers), the amount to be paid could depend on the sales that the business obtains: a fixed monthly minimum amount is established, and then the rent payment is increased or decreased accordingly, to the sales that the business generates.
In general, it is advisable that, if you have big growth plans for your business and you are going to sign a long-term contract, you should try to agree to pay a fixed amount of rent to avoid an increase that you did not foresee.
Exit clauses
Exit or escape clauses are clauses that are usually included in rental contracts that allow the tenant to be exonerated from the obligations of the contract if certain unfavorable situations occur.
Before signing the rental contract, you must ensure that it includes as many exit clauses in your favor as possible to minimize the loss that may arise if the business does not prosper as you expected.
The most common exit clauses, which you should try to obtain, are:
- possibility of selling the business: the possibility of selling or transferring the business, but you will still be responsible for the rent payments and for any faults committed by the new business owner.
- Possibility of transferring ownership of the contract if you decide to sell the business: Possibility of selling the business and, at the same time, transferring the rental contract to the new owner of the business, assuming responsibility for paying the rent and taking care of the premises.
- possibility of assigning the lease contract to a third party: the possibility that, for some reason, you assign or transmit the rights and duties of the contract to a third party, without having to consult with the lessor.
- possibility of subletting the premises: the possibility of renting part or all of the premises to a third party.
- Possibility of canceling the contract if for some reason the business cannot be opened: for example, if you are not granted an operating license or some other permit.
- possibility of dissolving the contract if the business does not prosper: a clause that the owner of a premises is unlikely to accept, but which can be obtained through good negotiation.
Works and improvements
In addition to the exit clauses, another aspect that you should take into account before signing a rental or lease contract is the carrying out of works or improvements to the premises.
Before signing the rental contract, you must agree with the owner of the premises, for example, what works or improvements you can do, what works or improvements you cannot do, and what works or improvements he should carry out if necessary; and then clearly specify these agreements in the contract.
Seek legal advice
Finally, before signing a rental or lease contract, you should always seek the help of a good lawyer with experience in the subject.
Lease contracts tend to be somewhat complex, and making a mistake when signing them could be very detrimental to your business, so in addition to being very careful when signing them, it is recommended that you have the advice of a good lawyer to help you. avoid making mistakes, but also to achieve the best possible conditions.
Guidelines for renting space in a shopping center
Renting premises located inside a shopping center will always be a good alternative due to the high influx of public that shopping centers usually have and, therefore, the high volume of sales that can be achieved.
However, renting a space in a shopping center has some disadvantages such as the high rental costs they usually have, and the requirements that shopping centers usually ask for to rent one of their premises, which are not usually easy to meet.
If you are considering the possibility of renting space in a shopping center, the following are some guidelines that will help you carefully analyze your decision:
- If you have a company in progress and want to open a branch in a shopping center, it is common for it to evaluate the history of the brand and the financial situation of the company. To do this, they could request, among other documents, the company’s financial statements, both historical and projected.
- Generally, large shopping centers seek to have well-known and prestigious brands, but they are likely to accept new businesses, as long as they prove to be attractive to the type of consumer who frequents the shopping center. To do this, they could request a business plan that demonstrates the attractiveness of the business idea and supports the potential that the business could have if it had a space in the shopping center.
- The granting of the rental of the premises is usually subject to the nature of the business. If, for example, it is a shopping center where the majority of businesses belong to the same category, the shopping center will ensure that the new businesses do not deviate too much from the type of business. But, on the other hand, if it is a shopping center where a variety of products are offered, the shopping center will ensure that there is a variety of offers and that there are not many businesses of the same type.
- The cost of renting a space in a shopping center is usually measured by the cost of each square meter. The cost varies depending on the shopping center, but to give you an idea, it could be said that the rent costs between 3 to 4 times more than what a store of the same size located on an avenue would cost; although, in the case of large shopping centers, the proportion could be much higher.
- In some cases, to determine the rental cost, the shopping center establishes a fixed monthly minimum amount, and then increases or decreases the rent according to the sales that the business generates each month. This type of arrangement might be convenient when a business is just starting, but as it prospers, the only beneficial thing might be the shopping center.
