Financing options to help businesses deal with rent increases

A third of small businesses could not afford to pay their rent over the past six months. And more than half of tenants have seen their commercial rent increase. If you’re wondering how we got here and how small business financing can help, that’s where Nav comes in.

This article examines why inflation is hitting the commercial real estate market, how tenants and landlords are both affected, and what you can do if you’re a small business struggling to pay rent.

Why is inflation hitting the small business rental market?

It has been two and a half years since the pandemic began. Landlords have been more flexible in recent years if their tenants weren’t able to pay rent, in part because it was the law. President Joe Biden implemented a law that prevented landlords from evicting their tenants during the pandemic. But in August 2021, the The Supreme Court voted to end this law. Landlords were then free to require small business tenants to repay rent or face eviction.

Additionally, the government assistance that kept many small businesses afloat at the start of the pandemic has run out. You can no longer apply for the Paycheck Protection Program (PPP) or Economic Disaster Loans (EIDL).

Tack on the highest economic inflation since 1981 and supply chain issues, and you have a situation ripe for small business rent inflation. Everything costs more, from gas prices and labor to utilities and supplies. Commercial real estate is just another item on the list.

Another possible cause for the increase in commercial rent prices has been around for years. Some commercial leases have a Consumer Price Index (CPI) provision which states that the rent will follow the increase in the cost of living (CPI is another way of saying inflation). As mentioned, inflation has increased significantly from May 2021 to May 2022. So if your lease has an CPI clause, your rental prices could increase along with the cost of your inventory.

Review of rent inflation in the consumer lease market

Residential housing is also affected by rent inflation. The United States is in the midst of an affordable housing crisis – and we need to add nearly seven million affordable houses and apartments to escape it. On a national level, rental prices have risen by more than 14% over the past 12 months. The Federal Reserve expects rents to rise another 3.4% in 2022 and 2023.

All this adds up to a situation where it is more expensive to rent an apartment or a house today than it was a year or two ago.

Currently, there is more federal assistance in residential space than in commercial space. For example, the national Emergency Rental Assistance Program aims to help families stay in their homes by helping them pay for rent or utilities.

Tenants and owners: two sides of the same coin

Landlords may not be raising their costs just because they want to rip off prices from their tenants. Instead, they are likely also facing increased costs. Homeowners are spending more to maintain their properties for things like cleaning, utilities and more expensive property taxes.

It also costs on average $3,500 to evict a tenant for expenses such as legal fees, court costs and lost rent, not to mention wasted time. So it makes sense that landlords and small business tenants want to work together to find a solution.

Some options are:

  • Reduce rental prices: If a small business cannot afford the current lease rent, it may be worth lowering the monthly price for the remainder of the lease to avoid the headache of an eviction.
  • Defer rent: If possible, a tenant and a landlord can agree on a later date when the full rent will be paid. This solution could work particularly well for seasonal businesses that should be able to pay rent once peak season arrives.
  • Waive part of the rent: This option is called rent reduction, and it is when a landlord decides not to charge the tenant the full cost of the rent they owe in exchange for paying the remainder due.
  • Transition to a loan: A landlord can swap the rent owed for a loan on which the tenant makes smaller monthly payments over time.
  • Use the deposit for the rent: Since most tenants are required to pay a deposit up front, a landlord may choose to apply this money to overdue rent.
  • Authorize a sublease: If a business cannot pay its rent, landlords can allow the tenant to find a sublet for the whole space or rent part of the commercial space to another tenant if the occupancy rate is sufficient. This eases the burden on the current tenant while allowing the landlord to get paid.

The worst places hit by corporate rent hikes, geographically

Rents have risen across the United States, but many metropolitan areas are among the hardest hit. Cities in Florida, such as Miami and Orlando, as well as Tucson, Arizona, have seen the the biggest rent increases in the last year. Other cities at the top of the list are San Diego, Nashville, New York and Austin, Texas.

It may come as a surprise due to its notoriously high cost of rent, but San Francisco has been the slowest growing metro area in terms of rent prices since the pandemic began.

What can small business owners do to ease the burden of rent inflation (besides going remote)?

Many small businesses depend on physical locations or in-person offices to operate, so going remote is not an option. But if paying your higher rent has become a problem, there may be solutions for you.

First, you can try to work out a solution with your landlord using one of the options described above. If that doesn’t work, check with your state or local government to see if there are any assistance programs that can help you. Local programs may be able to offer emergency assistance so you can pay the rent.

You can also seek legal help from a lawyer who can help you understand or negotiate your current lease or a new lease. Negotiating a long-term lease can help lower your monthly payment. There are affordable legal options available online through companies such as Legal mentionsZoom and RocketAvocado. If you’re based in New York, check out the nonprofit microenterprise project who can connect you with free help. Otherwise, consult your state bar for referrals to low-cost attorneys.

Additionally, you may be able to deduct your business rental costs on your taxes. While this won’t help you pay your rent immediately, it’s worth keeping in mind for future planning. If you have to end a lease, you can also deduct the associated costs from your taxes.

Finally, consider turning to business financing to increase your business’s access to cash. For your best options, check out our guidelines below.

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Financing options for commercial real estate leases

Small business owners and entrepreneurs can work with lenders to ease the pressure they face when trying to manage rent payments each month. Financing can be a fantastic way to help pay your business rent as long as you understand the fine print. Some options are:

Each of these options has pros and cons, which we explore below to help you decide which type of business financing is right for you.

Small Business Loans for Rental Expenses

Term loans can help cover immediate business expenses and are usually flexible enough to be used for rental purposes. These may offer lower interest rates than other options, but may be more difficult to obtain than other options, depending on the lender.

Small business lines of credit to help cover rent

A commercial line of credit is a reserve of money that you can draw on when needed (up to your prescribed credit limit). You only pay interest on what you borrow with a line of credit. This option can therefore work well during the months when you are late or need to complete your monthly payment.

Use of credit card financing to cover commercial lease payments

You can pay rent using business credit cards, but it’s best to do the math first. Many personal and business credit cards offer extended introductory periods at 0% interest, so you may be able to avoid interest when you first open the card. Just make sure you can either pay your bill in full before the interest kicks in, or afford to pay the interest on top of your balance. You also often have to pay a processing fee when you use a credit card to rent, but your card may offer rewards that offset the fee.

Nav is here to help you find the right financing options for small businesses. Simply create a free account at Nav.com, enter your business details and see your results instantly.

This article was originally written on July 8, 2022.

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