Owner-user financing can be a near-perfect loan option for financing your next venture.

The acquisition of a commercial property can be financed in a variety of different ways. Obviously, you have the option to pay with cash, but the vast majority of people do not possess the necessary funds to do so.

There is almost always a better use for your cash. And note that you will not be eligible for the interest paid write offs that you would be if you took out a loan instead.

When purchasing commercial real estate, using your own cash rather than taking out a loan to finance the purchase is almost never the best option.

In this light, let's take a look at one particular method of financing a commercial property, which is known as owner-user financing.

What exactly does “owner-user financing” mean?

Owner-user financing is a method of funding the acquisition of a commercial property through the use of a loan where the owner acts in dual capacities as the borrower and the tenant of the property.

The construction, purchase, or refinancing of owner-occupied commercial real estate can all be accomplished through the use of owner-user financing. That the property must be occupied by the owner is essential to understand.

In a nutshell, you need to “occupy” at least a portion of the property by being a tenant there. You will be able to collect rent from your tenants, which will assist you in making payments on your loan, which is a benefit of the type of commercial financing that you will receive through this option.

But owner-user financing isn't the best option for every business owner.

The size of the loan and the terms of the loan are determined by the lender based on the value of the property, the performance of the business, and the credit worthiness of the owner of the business. For instance, many lenders insist that owner-users demonstrate that their company has maintained a positive cashflow for the past two to three years before extending credit to them.

For the majority of owner-user loans, the borrower is also required to occupy at least 51 percent of the gross-rentable space (normally for a period of one year).

The majority of owner-user funding comes from traditional banking institutions. The Small Business Administration (SBA) is another excellent loan source that frequently provides better terms than banks do.

Banks are eager to establish owner-user loans because they are low-risk (knowing your borrower has a vested interest in the property is a big plus for banks) and they can help banks build better relationships. They know that once a business takes out an owner-user loan, they will be able to offer other banking services and products such as checking and savings accounts, credit cards, and auto loans.

Through SBA lending programs such as the SBA 504 loan program, owners can leverage great terms for their businesses.