One of the more difficult type of business financing to arrange is funding for leasehold improvements.
The main reasons why this can be challenging is that the leaseholds themselves do not provide any real security value to a lender or lease financing company.
Yes, the lender or lessor has the right to seize the asset and sell it to pay off or pay down the amount they are still owed. But when leaseholds are mostly paint, interior walls, wiring, lighting, and doors, there isn’t going to be any value in trying to resell them.
In fact, the process of even trying to end up costing the financing company money as opposed to taking this action to reduce the balance owing from a default.
The most common form of financing leaseholds is through a bank or institutional small business loan program that is partially insured by the federal government.
In these cases, the risk of loss to the lender is mitigated through the partial government guarantee of repayment that can be acted on in the event of lender loss.
But another form of leasehold financing that is growing in popularity is funding via an lease financing agreement with an equipment leasing company
Like any type of lease financing, the leasing company is the actual owner of the assets being financed which in this case is the actual leasehold improvements.
Because of the lack of security being held as well as the absence of any type of government insurance program or guarantee, leasing company’s will only offer this to very strong applicants which are typically in the medical industry, but call be in other industries as well.
In most cases, leaseholds are financed via a lease along with one or more equipment items and some leasing companies will only entertain leaseholds if items of equipment are also being financed, and are making up the majority of the financing amount.
But that’s not always the case either. Its possible to lease financing for leasehold improvements from an equipment leasing company where the only assets being leased are the leaseholds themselves.
And compared to the bank route for getting leased financed, the lease company approach is significantly faster to apply for, get approved, and funded.
All in all, if you are a business professional that can qualify for this type of leasehold financing, it may be something you want to consider, especially if you are working on a short timeline between where you are today and when the improvements need to be completed.
If you’d like to know more about financing leaseholds through a loan or lease, I recommend that you give us a call and we’ll go through your situation together and discuss the different financing options that may be available to you.