If your online business has been a success despite your lack of storefront space, you may be excited at the prospects that can await you once you expand to have a more robust presence. However, affording a commercial property -- which often requires heftier down payments and a more rigorous documentation process than found with most residential mortgages -- can be challenging for even well-established businesses, providing a significant hurdle to entry. This is especially true in high-priced or booming markets, like San Francisco, Seattle, and Boston. Could crowdfunding help you raise the needed money to qualify for a commercial loan? Read on to learn more about how this fundraising tactic can be used in the lending process.
Can crowdfunding be used to raise down payment funds?
The answer to this can often vary by lender. Many lenders want proof of your ability to save a down payment -- or your business's ability to afford the ongoing expenses inherent in owning a commercial property -- before extending credit to you, so being gifted a down payment or raising these funds through some means other than the sale of your product or provision of your services can sometimes exclude you from eligibility for a loan.
However, not all lenders have these restrictions. In particular, local or regional credit unions or small lenders that aren't bound by some of the restrictions imposed on national lenders may be more likely to extend credit as long as you meet other requirements, regardless of how you obtained your down payment. In addition, exceeding your crowdfunding goal could allow you to qualify for a hard money loan, a type of commercial loan that requires a larger-than-average down payment but can carry a more competitive interest rate and shorter repayment term.
Should you crowdfund to afford your own commercial building?
Before you make the decision to set up a crowdfunding page for your own business, you'll want to ask yourself a few questions.
The first is whether you'll be able to afford the taxes and maintenance costs of the building you plan to purchase if you manage to raise the down payment through crowdfunding. Otherwise, you run the risk of raising funds and still being unable to qualify for the loan you wanted, potentially causing your donors to consider asking for a refund.
You'll also want to evaluate the potential effect of crowdfunding on your business's reputation. If your business provides a necessary service to a tight-knit or underserved population, it's likely you have a supportive community who will do everything they can to help you. On the other hand, if you have a more impersonal business (like reselling items purchased at a discount), soliciting funds through crowdfunding could be seen as requesting a handout, rather than a hand up.
While you'll always want to do your own marketing research, in many cases, crowdfunding can be a viable path to storefront ownership.Share