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How to Find the Perfect Location for Your Small Business
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Many restaurants, retailers and other storefronts rely on their immediate surroundings to build up a customer base, and choosing the right business location can be vital to success.
“If you’re a brick-and-mortar like a restaurant or dry cleaner, your [customers are] coming from a geographic area that’s probably a mile, or maybe two, from that location,” said Dennis Zink, business mentor with SCORE, which provides education nationwide in partnership with the U.S. Small Business Administration.
Whether you’re opening a new business or relocating your company, we have steps for analyzing the best spots in finding the perfect location for your small business.
- Determine what you need in a space.
- Check local zoning rules.
- Decide to rent or buy.
- Research local demographics.
- Hire a real estate broker.
How to choose a business location
When selecting a location for your business, follow these five steps to make sure you pick the right place.
1. Determine what you need in a space.
The type of business you run would affect the location you choose. Your location would need to reflect the habits of your customers and how they would access the business. For instance, consider whether customers would more likely arrive on foot or by car. Your business location analysis would help you determine if you need a space with ample parking or if you would benefit more from being in an area with high foot traffic.
Also, you may or may not want similar businesses to surround your shop. In some cases, it could be valuable to have related businesses nearby, like if you own a clothing store. People may spend an extended period of time in an area with multiple stores.
Offices and retail space can be classified into one of three categories: Class A, Class B or Class C. Premier buildings with high-quality finishes and above-average rent are considered Class A, while Class B offices have good but less refined finishes and average rent. Class C buildings are functional spaces with below-average rent for the area.
“If you’re not getting a lot of people visiting, then you really don’t need Class A space,” Zink said. “You don’t need the fancy stuff and everything that goes with it.”
2. Check local zoning rules.
Not all locations are designed for any kind of business. The local planning or zoning board in your area determines which activities are allowed at a given location. You would need to determine which areas could accommodate your business activities.
Even if you plan to work out of your home, you would be subject to zoning laws that regulate residential areas. Before establishing a home-based business, understand the rules and requirements that affect home businesses in your city, town or county, even your neighborhood.
You could research the average rental costs in the area where you’d like to set up shop. Commercial real estate brokers and agents could also provide cost information for different neighborhoods.
3. Decide to rent or buy.
After you’ve considered what you need in a space, which areas accommodate your type of business and checked out market rates, then you can decide whether buying or renting would be best for your budget.
Pros of buying a business property
Buying a property would require you to pay cash upfront or finance the purchase with a loan. If you have enough funding to cover a down payment and at least six months of mortgage payments, buying a business location would allow you to build equity in the property instead of spending that money on a lease. You may also be able to deduct interest and depreciation to reduce your tax bill. As the owner, you would be in control of the space and could make changes as you wish.
Pros of renting a business property
Renting a space could free up cash to put toward your business, as you wouldn’t have to make a down payment on a building. You also may be able to rent a prime location that is too expensive to buy, though monthly rent payments typically exceed mortgage bills as the landlord passes on the cost of insurance and taxes. Additionally, leasing would give you more flexibility if you want to relocate somewhere else, but keep in mind your landlord could raise the rent if you decide to stay.
Startups should start out renting. New business owners are more likely to rent their first location, as most startups don’t yet have the cash to purchase commercial real estate. Look for a place that has affordable monthly rent based on your projected revenue and business expenses.
Startup owners may want to wait until the business proves successful to purchase office space, Zink said. In the meantime, look for a lease that’s as short as possible to avoid being on the hook for rent for too long if the business fails.
4. Research local demographics.
Search online databases to find out if your desired location would support your target customer market. You could use websites such as City-Data or the Census Bureau to find out if the customers you want to attract – as well as the people you want to hire – reside nearby.
Also, consider researching the area’s economic climate, as well as the types of businesses that have opened and closed in the neighborhood. Your local chamber of commerce could provide information about tax incentives. For example:
- Historic tax credits: In addition to the federal Historic Preservation Tax Incentive, a majority of states offer an additional tax break to business owners who buy and rehabilitate historic properties. Banks, insurance companies or other investors receive the tax credits as a pass-through in exchange for funding the projects.
- Opportunity Zones: The new kid on the block, compared with the older historic tax credit program, Opportunity Zones was created as part of the 2017 Tax Cuts and Job Act. The highlighted zones are typically areas with lower incomes and higher rates of poverty and unemployment. Corporations that invest in these communities are eligible for tax benefits.
5. Hire a real estate broker.
A commercial real estate broker could act as your advisor during the process of selecting a business location. Your broker should understand all aspects of the business, including target market and product offering, to determine your location, price point and physical requirements of the space.
If you decide to lease space, you may want to work with a different broker than your landlord to ensure they have your best interest in mind. Your broker could negotiate the terms of the lease and close the deal on your behalf.
“It will save you a lot of time to work with someone who knows the lay of the land,” Zink said.
Questions to ask when searching for a business location
Before settling on a space for your small business, here are a few questions to ask to help make the right decision.
Can you grow in the space?
Your business may initially fit in a small location but consider the future growth of the company. If you expect to expand, you’ll likely need to hire more people or use more production space.
Before signing a lengthy lease or buying a building, think about whether you could alter the layout to accommodate business growth. Otherwise, you may be cramped in a tight space.
Be careful to plan appropriately and avoid moving into an area that turns out to be too big, as the cost would be based on price per square foot, Zink said. The office should be reasonably full, possibly at 75% capacity at first, to justify the cost.
“You don’t want empty space that’s just sitting there,” he said. “If you’re not using it or you guess wrong, you’re going to be paying for that.”
If relocating, can you manage the move?
Established businesses that are moving to a new location have to take extra precautions. Consider how the change in distance would affect your employees. They may not be willing to travel farther to the office, or they may ask to be compensated for a longer commute, Zink said.
Physically moving your business could be a dayslong endeavor. You may need to shut down until getting settled in the new space and you’d need to budget for the closure, Zink said.
Is the building outfitted for your business’s needs?
The location you choose should be set up to support your particular business, Zink said. Whether that means the building has proper wiring to support your technology or room for large equipment, make sure the business can function in the space.
Don’t take for granted standard building features like sufficient air conditioning and electrical power. You’ll need enough power outlets and circuit capacity to power your business, as well as air conditioning to keep your employees and your tech equipment cool.
Do you need it?
Office space is often the biggest expense for a business owner, Zink said. Moving into an office could be a one-time cost but rent or mortgage payments would be an ongoing expense that the business must be able to cover.
Before blowing your budget on an elaborate office, ask yourself if the location would benefit the business. If you could do the same work at home or a shared coworking space, you may be able to save resources that could be reinvested in the business.
But if you’re in a place to buy or lease a business location, be thoughtful when going through the process. Research as much as possible to ensure it’s the perfect location for your small business.
“The more planning you can do, the better off you’re going to be,” Zink said.