Opening a new store, relocating to another venue, or expanding the number of branches your small business operates are three situations that tend to be quite exciting but stressful at the same time.
The uncertainty about how things are going to play out, the costs involved, and the opportunity that such a move presents are just some of the variables that entrepreneurs must manage when leasing a new physical establishment.
When you access small business financing, it can help in reducing the pressure that this transaction could put on the company’s cash flow. And there are certain recommendations that business owners should follow to make sure they get the best deals out there.
The following article aims to dig deeper into how securing a great retail lease can improve the odds of succeeding in launching a profitable store.
The importance of managing the cost of your lease when opening a store
Experts agree that in real estate there are three keys to a successful venue: location, location, and… location.
What this means is that the place where your store is located will be of great importance in increasing the odds of its commercial success.
That said, some locations are so expensive that the cost just doesn’t make sense from a financial standpoint and this is when small business owners must try to find a balance between a formidable location and a profitable location.
In this regard, one variable to keep an eye on when forecasting the financials of your prospective store is the break-even point.
The higher the cost of your lease, the higher the amount of revenue you’ll have to bring in to break-even.
Additionally, if you are taking small business financing to pay for renovations and other similar expenses, interest charges resulting from that can add up to increase that level even further.
Research the market extensively and try to find a place that makes sense both from a commercial and financial standpoint.
Key elements to watch for when searching for a retail lease
When leasing a commercial space for your store, you should keep an eye on the following five variables:
- Terms and conditions of the contract.
- Convenience of the layout.
All of those five variables have similar importance, although the most relevant ones are price, location, and terms of the contract.
Price: When it comes to price, as already stated above, the cost of leasing should be coherent with a realistic and profitable top and bottom-line forecast.
These forecasts could be modeled by using multiple scenarios. For example, a base case forecast can be drafted with the average expected sales conditions, while two other scenarios (optimistic and pessimistic) could also be modeled to see how the profitability of the business will behave under different circumstances.
As a rule of thumb, the business should be able to cover the price of the lease under the pessimistic scenario.
Location: A great location will play a key role in driving traffic to your store or it can also be a great asset for some other types of businesses as well. For example, if the place is near the local ports that would result in significant savings coming from lower transportation costs.
Great locations often come at a higher cost compared to those that tend to drive less traffic. However, the convenience of the location is the most important thing, rather than how popular the place is.
If the location is convenient for your target audience, you can probably get a good deal while relying on marketing strategies to attract traffic to your establishment.
Terms of the contract: The terms and conditions of your lease are particularly important and you should get a professional legal advisor to read the contract before signing to make sure there are no hidden clauses that could harm you financially.
Size: The size of the property is also an important variable to keep in mind when attempting to identify competitive leases. Business owners can employ metrics like the rent-per-square-meter ratio, which can be used to compare different leases based on their size.
The lease that offers the lowest ratio will often be the most appealing all things being equal.
That said, it is important to determine how much space the business actually needs before shopping around as leasing a space that is too large can lead to an underused venue that generates unnecessary high renting costs.
Convenience of the layout: Since not all businesses are the same, the different layouts offered by commercial properties will often determine if the venue is a suitable one or not. For example, restaurants need ample free space to locate tables and they can also use a separate space for the kitchen. That same layout might not be advantageous for a shoe store.
Keep in mind that the proper layout can save you a lot of money in remodeling costs as tearing down walls and performing other similar jobs can add some undesired extra costs.
Alternatives to finance the cost of opening and store
Opening a store involves multiple expenses such as the cost of remodeling, paying for the legal fees involved in the transaction, or securing the permits required to open up the place.
Acquiring small business financing can be quite advantageous in these cases to avoid putting too much pressure on the company’s cash flow as that could lead to disruptions in the firm’s operations.
Sure, small business financing comes at a cost, but that expense is often feasible if you seek a provider that is flexible enough to grant you a favorable credit term based on your needs and the prospective growth of your store.
Leasing a place for your store is a big decision that you should not take lightly. With that in mind, the variables discussed above can help you determine if the leases you are currently analyzing represent a good opportunity for your business or not.
Meanwhile, make sure you understand the financial weight that such a lease will put on your store’s finances and don’t be afraid of seeking some extra small business financing to cover the cost of moving as this will help you keep your cash in positive territory while you settle.