Funding a commercial project is not usually easy, considering the scale of cash needed. Not all investors have chunks of money lying around, and even if you have one, sometimes it makes more business sense to use other people’s money, allowing you to invest your funds in other aspects of the business.
When getting a fund for your commercial property, it is important that the fund comes from a place where the refund process (if any) would not hurt your business in the long run.
You can use different financing options to fund your commercial construction project. This article will guide you.
Real estate crowdfunding
Crowdfunding is significantly gaining popularity in the real estate industry. Instead of approaching banks or soliciting funds from your friends and family, crowdfunding allows you to get funds from many investors.
Crowdfunding allows micro-investors to come together to fund large projects. This method involves raising capital from micro-investors using social media, forums, and websites.
They typically get equity in return for their investment, hence becoming shareholders.
Traditional bank loans
This is one of the most common financing options for commercial construction projects. Banks typically assess the contractor’s creditworthiness, business plan, and collateral to approve the loan.
As banks become more risk-averse, obtaining this kind of loan has become more difficult. Meanwhile, many banks are not in the construction business; they usually show less interest in loaning contractors. Another limitation of this kind of loan is the need for collateral, which might be unavailable, especially if you had initially used your equipment as collateral for another loan.
Hard money or private lenders
Hard money loans are short-term loans used to finance commercial real estate purchases, renovations, or repairs. Also called bridge loans, Commercial Hard Money Loans, are secured by the property they are tied to instead of your creditworthiness or financial project.
It is faster and easier to secure, unlike traditional bank loans. For this reason, they are preferred by investors such as house flippers or developers. Real estate investors facing foreclosure can also access the loan.
Credit cards
Borrowing from friends and families comes with the risk of jeopardizing a lifetime relationship. Likewise, approaching a bank for a personal loan to finance your real estate investment has a higher level of individual risk.
However, if you have a business credit card with high limits, it can be a fast finance option for your project. It also reduces your risk exposure, but like a personal credit card, your interest will be influenced by the creditworthiness of your business.
Some business credit cards also offer extended periods of interest-free financing compared to typical personal credit cards.
Grants and government-backed loans
These finance options are usually difficult to access. Grants provided by governments and foundations are not repayable; hence, free money for your commercial real estate project. However, sponsors typically conduct thorough assessments of all applicants to choose companies and individuals with projects that align with their mission.
To increase your chances of getting approval for grants, thoroughly read the grant sponsor’s eligibility criteria.
On the other hand, government-backed loans are repayable but usually have a low-interest rate compared to traditional loan options. For instance, the interest rate for a Small Business Administration (SBA) loan that is backed by the government is between 8 percent and 13 percent.
The process is also strenuous and may take longer and require more paperwork before getting approval.
Construction loans
Construction loans are specifically designed to finance commercial construction projects. It is used to finance land purchases, labor, materials, plans, permits, and other fees related to the project.
The lender disburses the loan in phases as the project reaches predetermined milestones. Some construction loans do not require repayment until the project is completed. Once the project is completed, the borrower either pays in full or converts the loan into a conventional mortgage.
Private Equity
You raise funds from individuals or firms that invest their capital in exchange for an ownership stake in the project. These investors are typically looking for high returns on their investments.
Nevertheless, it always comes with a higher cost, as you will be giving up some if not most, ownership and control of the project. Profits will also be shared with private equity firms as repayment for the loan.
Mezzanine financing
Mezzanine financing is a hybrid of debt and equity financing for commercial construction projects.
Like typical loans, it requires repayment with interest but may include options to convert the loan amount to equity.
It is usually recorded as equity on the balance sheet, making your project appear less risky to traditional lenders, therefore, allowing for additional debt financing.
When compared to traditional debt, mezzanine financing is more expensive but cheaper than typical equity in terms of the overall cost of capital.
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