February 4, 2019 Last updated February 22nd, 2019 292 Reads share

Choose the Right Office for Your Startup and Manage Its Financials

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As a startup begins to move up the growth ladder, there comes a time when moving to a professional setup is necessary. Transitioning your startup to an office space may be a difficult prospect, but one that you cannot avoid if you are looking for growth. After all, choosing the right office space will have a significant impact on your business.

You are probably just at a stage where you have started bringing in revenue but are not profitable yet. You cannot predict your growth for the next six months, let alone for the next six years. You probably just have five employees right now, but you have no clue of how many you will have in the coming years. In a scenario like this, you need to consider a few factors and choose a possibility depending on your unique needs.

  1. Estimate the space you need: Begin by making a headcount projection and ask yourself how many employees you wish to hire in future. Then decide how much space you would require by making an estimate of the amount of space required per person. Keeping aside 150 to 250 square feet per person can be a good number to consider. That comes out to be roughly 1000 square feet for four to six employees. Look for spaces which are more efficient according to the layout and floor plan.
  2. Keep a centralized location: Take the convenience of your employees into consideration. While narrowing down possible locations for your office, see which ones make it easy for your employees to commute on a daily basis. This will be beneficial to you in the long run in terms of talent retention.
  3. Explore your options: Startups are unpredictable and run on a strict budget. It is, therefore, necessary to evaluate options before making an informed decision. Most startups go for leasing office space. However, it is best not to tie yourself up in a long-term (direct) lease agreement. A direct lease agreement requires you to be tied to it for five to seven years which is a long commitment for a startup. So, before you settle for a direct lease explore other options such as a sublease agreement, shared and co-working spaces. Shared and co-working spaces are an excellent option to explore if you are running on a tight budget and it is too early to predict your long term growth. Co-working spaces are a trendy way to share space with other startups. They have evolved into communities with like-minded people and also allow startups to grow their network by building connections. Since you share space, you don’t have to bear the burden that comes with traditional office space. The options are flexible as you can rent a range of spaces on an hourly, weekly, monthly basis or more.
  4. Check for amenities: The location around the office must have facilities like eating joints, shopping outlets, proximity to a public transport facility and parking arrangements. Within the office, you need to check whether the office supports your technological requirements like phone, internet etc. The office should have arrangements for a conference room, kitchen, bathroom, and other facilities.
  5. Choose the right layout: The layout of your office should match your business requirements. For instance, a tech startup thrives well in an open and collaborative environment where people can get together and discuss ideas. On the other hand, a law firm would keep privacy on top priority. Similarly, rectangular spaces can accommodate more people than the ones with rounded or angled corners with the same area.

Should startups rent or buy?

Although leasing office space is the most viable option for a startup, small business owners are considering buying an office. With low interest rates and modified accounting standards, business owners are looking at the advantages of buying office space.

Investing in an office is a good option to consider as you can earn equity. That combined with low-interest rates can be a pretty good deal. If you are able to purchase a property which offers additional rentable space, that’s the icing on the cake as it increases your return.

However, depending on your business objectives and financial situation you need to evaluate what will suit you best, renting or buying an office. Buying or investing in an office space is a long-term commitment which is sometimes not possible for startups. It also requires a high amount of down payment. So, this option is best for small businesses having adequate financial resources.

On the other hand, for a new startup, leasing is a short-term commitment that requires just a refundable deposit in the beginning. Leasing an office also gives flexibility, as you can move out whenever the office no longer fits your requirements.

You may enjoy tax deductions, such as mortgage interest and property taxes from the associated costs of owning your own commercial space. When it comes to leasing, your monthly payments are typically tax-deductible as a business expense.

Managing your financials

Financial backup is required whether you decide to rent or buy. Before you approach your lender, broker, or investor, consider the following points to ensure that your financial situation is in order before you take the leap.

  1. Your business plan should be well-researched and should cover all essential points. It should be as comprehensive as possible covering all key financial figures which will be enough to convince lenders and investors to finance your office space. You might want to consult your financial advisor to be sure you do not miss out on anything.
  2. Evaluate your financial situation to determine how much you have to borrow. Keep in mind the following factors for the same.
    • Do you need the money urgently?
    • Work out the maximum repayment amount possible for you.
    • What assets do you want to keep as collateral?
    • Determine your Loan to Value Ratio to assess your risk factor.
    • Determine your guarantor.
    • How much equity do you have?
    • What is the maximum share of your business you can offer to your investors?
  3. Real estate can prove to be a major investment for a startup. It requires thorough research and shopping around for the best deals when arranging for finance. Look for cheaper options with flexible terms and choose the best combination.
  4. If you are already an established startup, keep your current profit & loss statements, balance sheets, cash flow statements, and other documents in place to present your company in the best financial order. If you are going for a lease, landlords usually ask for a security deposit or personal guaranty.

Deciding whether to buy or lease an office space depends on your business requirements. That’s why it is essential that you lay down your business and real estate objectives well in advance. Plan out according to your future growth plans and align them with your office space requirements.

To optimize your search you have to have a proper understanding of your specifications, budget and the process you will undertake to carry out your search. Give yourself enough time to explore all your options to see what suits you best.

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Rakesh Gupta

Rakesh Gupta

Rakesh Gupta is a Credit Advisor and Director at ARG Finance. Rakesh is an exceptional leader and innovator. With over 8 years of experience in the real estate consulting, Rakesh brings a wealth of knowledge to the table at ARG Finance. He works closely with his clients to fulfill their dreams of owning a home or investing in the property market. Rakesh is also a full member with Mortgage and Finance Association of Australia (MFAA).

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