SoFi

Loan crowdfunding, also known as debt crowdfunding or peer-to-peer lending, is a source of capital for small businesses where a number of investors (a.k.a. the “crowd”) lend money to early-stage businesses or individuals through a regulated platform.

In some cases, crowdfunded loans can be easier to get and offer better terms and interest rates than traditional bank loans. Read on to learn more about how debt crowdfunding works, plus how it compares to other startup funding options for small businesses.

What Is Loan Crowdfunding?

Loan crowdfunding is used to raise capital by taking loans from several investors (lenders) who expect to be repaid for their loan with added interest over the period that the loan was used. The entire process takes place through a crowdfunding platform.

In removing many of the middlemen that would be involved if the transaction happened through a bank, debt crowdfunding can keep the costs down for borrowers while potentially giving the lenders improved rates of return.

Loan crowdfunding differs from other forms of crowdfunding. Equity crowdfunding, for example, gives investors partial ownership of a company if they invest in the equity crowdfunding campaign.

With reward crowdfunding, on the other hand, a business provides investors with a reward, such as early access to the new product, but doesn’t offer any repayment in the future.

What Are the Different Types of Loan Crowdfunding?

There are three main types of loan crowdfunding:

P2P Lending: Peer-to-peer lending is when potential investors are matched with borrowers in search of raising capital. Depending on the loan amount, a borrower may receive funds from a single investor or a group of investors. While borrowers are able to gain access to needed capital without having to meet a lender’s credit requirements, credit scores may be taken into account when calculating interest.

Microloans: Microloans involve individuals issuing loans directly to borrowers, but in smaller amounts. According to the U.S. Small Business Association (SBA), a microloan is anything under $50,000. However, many microloan platforms typically provide much smaller loans.

Invoice Financing: Invoice financing allows a business to borrow against unpaid invoices owed by clients. Instead of harassing customers for money, a company that takes advantage of invoice financing can remain on good terms with all of its clients. However, the investors keep a percentage of the invoice once it’s paid.

How Do You Find Investors?

To raise the money you need to start a business or grow an existing business using this lending model, you’ll first need to register on a crowdfunding or peer-to-peer lending platform. Some debt-based crowdfunding platforms you may want to check out include:

•  Funding Circle

•  Honeycomb Credit

•  Lending Club

•  Kiva

•  Mainvest

•  Prosper

•  SMBX

•  Worthy Bonds

Once you register with a platform, you will likely need to draft a pitch with the details of the loan your are looking for, such as how much you are looking to raise, the type of investors you’re looking for, how many investors you’re looking for, what your business plan is, and what the funds will be used for.

Typically, the platform will then conduct a background check of your company and its principals to prove your credibility. If your offering is accepted, the platform will offer you a rate of return and applicable fees that correlate with the type of business you have and overall risk involved in the business being successful.

You may also need to provide some form of security, such as personal guarantee or a business asset.

Once this is complete, the platform can then promote your venture to investors through its online channels.

What Are the Benefits of Loan Crowdfunding?

Debt crowdfunding often comes with better terms than traditional loans. For many borrowers, the loans are greenlit faster than they would be with a bank or online lender. Standard SBA loans can take a few months to process, but loan crowdfunding can often take place in just a matter of days. The interest rates are often lower, too.

As with other forms of crowdfunding for small businesses, the process of applying for debt crowdfunding gets your name out there, can help to create some buzz around your business, and builds a community that supports your business.

Unlike other crowdfunding models, however, you don’t have to share equity of your company with the investors. This means that they have less of a say in how you run your day-to-day business. As long as you repay the interest on time and there is no fear that the principal of the loan runs any risk, you are generally able to run your business as you see fit.

Recommended: A Guide to Reward-Based Crowdfunding

Loan Crowdfunding vs Traditional Small Business Loans

It can be easier to qualify for loan crowdfunding than it is for traditional small business loans. For example, many traditional lenders want to see a strong credit score, financial statements, and tax returns that illustrate multiple years of positive cash flow. To get an SBA loan through a bank can take anywhere from 30 to 90 days. A P2P loan, on the other hand, often only takes a few days.

While crowdfunding loans also have requirements, those requirements differ with each platform. If one is too stringent, borrowers can simply try another knowing that the application process will be different with each company. Bank requirements, on the other hand, tend to be the same no matter what institution you’re working with.

Similar to a loan from a bank, your debt interest paid to investors can likely be deducted as a business expense under your company’s tax return.

Recommended: Fees for Small Business Loans

What Risks Are Involved With Loan Crowdfunding?

Like any loan, you have to repay the crowdfunded loan with the agreed-upon interest and within the agreed-upon time — regardless of how your business is performing.

If your business can’t repay the debts, you may be forced to sell off your assets and close your business. If you provided a personal guarantee for the loan, you might also be held accountable for all or some of the debts that your business has amassed. Your assets could be in jeopardy and your personal credit score could drop.

What Are Some Alternatives to Crowdfunding Loans?

Many peer-to-peer lending platforms have maximum loan amounts of only $40,000, so debt crowdfunding loans may not be high enough to meet the demands of many small business owners’ needs. In addition, loan crowdfunding may not be ideal for startups, since investors often prefer investing in businesses that already have a good track record.

Fortunately, crowdfunding loans are just one of the many types of financing options small businesses have. Other options include:

SBA Loans. SBA loans are backed by the U.S. Small Business Administration (SBA) to provide loans to startups and small businesses. Instead of directly lending to the businesses, the SBA guarantees a portion of the loan, which lets startup businesses access loans with more competitive rates and repayment terms.

​​Personal Loans. Personal loans are typically unsecured and based on your personal credit history (not business credit). This can be a versatile financing option, but keep in mind that some personal lenders do not allow funds to be used for business purposes.

Online Business Loans. Some online lenders offer similar loan options as a traditional bank, but typically have a faster approval process and may offer more options (though usually at higher interest rates) for people with lower credit scores.

Business Line of Credit. A business line of credit is a short-term financing option that can be revolving or non-revolving in which you pay interest on unpaid balances.

Merchant Cash Advance. A merchant cash advance offers cash up front in return for a portion of a business’s future sales. Since they aren’t loans, MCAs do not require collateral and merchant cash advance companies typically won’t look at your credit scores to determine approval.

Grants. Small business grants are awards given by a government agency, foundation, nonprofit, or other entity that typically don’t have to be repaid. Grants may be sector- or demographic-specific in their focus. For federal grant opportunities, Grants.gov and Challenge.gov are good places to begin searching.

The Takeaway

Crowdfunding loans provide an alternative avenue to traditional bank loans for small businesses. Offered by many peer-to-peer lending platforms, you are responsible for paying back the money from investors that funded your campaign, typically with interest.

Loan crowdfunding may have more favorable terms, lower interest rates, and quicker approval times than traditional loans, but the amount you can borrow may be limited, and qualification requirements vary from one platform to the next.

If you’re seeking financing for your business, SoFi can help. On SoFi’s marketplace, you can shop top providers today to access the capital you need. Find a personalized business financing option today in minutes.

Photo credit: iStock/Drazen_

SoFi's marketplace is owned and operated by SoFi Lending Corp. See SoFi Lending Corp. licensing information below. Advertising Disclosures: SoFi receives compensation in the event you obtain a loan through SoFi’s marketplace. This affects whether a product or service is featured on this site and could affect the order of presentation. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

SOSB-Q224-1869664-V1

Pennsylvania has about 1.1 million small business owners statewide who can apply for small business grants. Submitting an application and competing for Pennsylvania small business grants can help you grow your small or medium-sized enterprise in the Keystone State.

Pennsylvania’s economy has a gross domestic product of $923.1 billion as of 2022. That’s the sixth largest GDP in the United States out of the 50 states and the District of Columbia. Small businesses contribute to the nation’s economy.

Below we highlight some of the top small business grants in Pennsylvania that you can explore.

Grants for Small Businesses in PA

If you’re looking for small business grants in Pennsylvania, here are some potential options to consider:

Pennsylvania’s Global Access Program (GAP) Grant

•  Program description: GAP is Pennsylvania’s State Trade and Export Promotion (STEP) grant reimbursement program that can help you export your goods and services from the Keystone State to foreign markets.

•  Incentive: Receive up to $10K in reimbursements for eligible business expenses, including international marketing and trade show participation costs.

•  General requirements: Here are some of the general requirements for this grant:

◦  Be a Pennsylvania small or midsized business licensed to manufacture, assemble, and distribute a product or provide an exportable service

◦  Be in good standing with the Pennsylvania Department of Revenue and IRS
Identify one or more specific, achievable, export initiatives requiring financial support

◦  Be organized or incorporated in the United States

◦  Be an export-ready Pennsylvania company

◦  Be an active company with at least one year of operational experience

•  How to apply: Submit your Pennsylvania GAP application to a local Regional Export Network (REN) office prior to the qualifying activity for which funding is sought. Local REN contacts may forward your application to the GAP administrator for final review.

Small Business Advantage Grant Program

•  Program description: Pennsylvania’s Small Business Advantage Grant can defray some of the costs of making energy efficiency improvements or pollution prevention changes to your Pennsylvania small business operations.

•  Incentive: Get reimbursed up to $5K for a single eligible project and up to $8K for implementing an eligible green project in a designated Environmental Justice Area with significant environmental savings.

•  General requirements: Here are some of the general requirements for this grant:

◦  Be a Pennsylvania small business with 100 or fewer full-time employees

◦  Propose an energy efficiency or pollution-prevention project that saves your small business an annual minimum of $500 and at least 20% in energy use or pollution-related expenses

◦  Be registered to do business in Pennsylvania

◦  Have or obtain a Vendor Identification Number (also called an SAP Vendor Number) from the Pennsylvania Office of Budget

•  How to apply: You can complete the Small Business Advantage Grant application online via the Pennsylvania Department of Community and Economic Development (DCED) website. Note that there will be deadlines for annual applications that must be observed.

Philadelphia’s Fair Chance Hiring Initiative (FCHI)

•  Program description: The FCHI program provides financial incentives to Philadelphia employers who hire local residents returning from incarceration within the last seven years.

•  Incentive: Eligible employers who hire qualifying employees can receive a $6 per hour wage reimbursement for compensable hours worked up to 960 hours within 180 days of employment and a one-time $500 employment retention grant for each FCHI employee who completes the new hire period.

•  General requirements: Here are some of the general requirements for this grant:

◦  Be a Philadelphia-based employer

◦  Generate less than $5 million in annual revenue

◦  Hire qualifying Philadelphians returning from incarceration within the last seven years

◦  Compensate qualifying employees at a minimum of $12.20 per hour

◦  Provide qualifying employees a minimum of 21 work hours per week

◦  Retain qualifying employees for a minimum of 90 calendar days

◦  Be registered and licensed with the City of Philadelphia and current on all applicable taxes

•  How to apply: Contact the FCHI program to see whether you qualify for the FCHI grant and wage reimbursement program.

Philadelphia Business Security Camera Program

•  Program description: This program can help Philadelphia business owners buy and install exterior cameras on commercial properties.

•  Incentive: Receive up to $3,000 in reimbursement for installing exterior security cameras to a single commercial property in Philadelphia.

•  General requirements: Here are some of the general requirements for this grant:

◦  Own or lease commercially occupied property in Philadelphia

◦  Be registered and licensed with the City of Philadelphia as a local business

◦  Plan a project with cost estimates of installing exterior cameras onto your commercial property

◦  Be current on all applicable taxes, water revenue billings, licenses, and any other obligations

•  How to apply: You can access and submit the Business Security Camera Program application online.

Philadelphia’s Storefront Improvement Program (SIP) Grant

•  Program description: This grant reimburses eligible property owners for some of the costs of improving a commercial building exterior or façade in the City of Brotherly Love.

•  Incentive: Receive up to $10K in reimbursements for making façade improvements to an eligible single commercial property in Philadelphia or up to $15K for improving an eligible corner property or large commercial building with multiple addresses.

•  General requirements: Here are some of the general requirements for this grant:

◦  Own or lease commercially occupied property on an eligible block within a commercial corridor in the City of Philadelphia

◦  Plan an eligible storefront improvement project

◦  Be current on all applicable taxes, water revenue billings, licenses, and any other obligations

◦  Have any necessary licenses and registration credentials with the City of Philadelphia as a commercial property owner or tenant

•  How to apply: You can access and submit the SIP grant application online. Some projects are not eligible for this grant, including projects that would improve buildings occupied by or owned by religious institutions, schools, colleges, government offices, and elected officials.

Who Provides Small Business Grants in PA?

Local and state government agencies, including the Pennsylvania DCED’s Office of International Business Development and Philadelphia’s Department of Commerce, offer a variety of small business grants in Pennsylvania.

Recommended: Georgia small business grants

Do You Have to Pay Back a Small Business Grant?

A small business grant typically comes with terms and conditions, and you may be responsible for paying back the grant if you violate those terms. In general, small and midsized business owners are not required to pay back an SMB grant absent any violations.

You typically have to sign a funding agreement to accept a small business grant. As mentioned above, the grant may come with certain conditions. Using the grant for an illegitimate purpose may violate the agreement and require business owners to pay back the grant.

Small business grants may require you to spend the money by a certain date. You may also have to provide proof of payment and a written statement detailing how you’ve spent the grant.

Recommended: What Is Organic Growth?

Who Is Eligible for Small Business Grants in PA?

Local business owners or operators of an enterprise with fewer than 500 employees may be eligible for small business grants in Pennsylvania.

The U.S. Small Business Administration’s Office of Advocacy generally defines a small business as an independent business having fewer than 500 employees. A small business, including individuals with freelancing business ideas, may be eligible for small business grants.

What Industries Does PA Support With Grants?

Pennsylvania offers a variety of grants supporting the following industries:

•  Food services and drinking places

•  Food and beverage stores

•  Hair, nail, and skin care services

•  Manufacturing

•  Retail trade (store and nonstore retailers)

PA Resources for SMB Owners Looking for Funding

Here are some resources for small and medium-sized businesses looking for funding in the Keystone State:

Pennsylvania Small Business Development Centers (SBDC)

Pennsylvania SBDC facilities across the commonwealth can provide Pennsylvania small business owners with the following services:

•  Business training seminars, webinars, and workshops

•  Access to market research tools and databases

•  Confidential business consulting at no cost

SBA District Offices in PA

The U.S. Small Business Administration (SBA) is a federal agency that provides resources and support to small business owners. The SBA has two district offices in Pennsylvania:

•  SBA Philadelphia District Office. This SBA district serves 40 counties in eastern Pennsylvania. Depending on where you’re based, you can contact the main office in King of Prussia, satellite office In Harrisburg, or the virtual office in Wilkes-Barre.

•  SBA Pittsburgh District Office. This SBA district serves 27 counties in western Pennsylvania. It’s based in Pittsburgh.

Alternative Funding Sources for Small Businesses in PA

Here are some alternative funding sources for small businesses in Pennsylvania:

Pennsylvania State Small Business Credit Initiative (SSBCI)

Pennsylvania’s SSBCI is a federally funded program for small business owners in the Keystone State. Federal law — the American Rescue Plan Act of 2021 — allocates more than $267.8 million to Pennsylvania’s State Small Business Credit Initiative program.
Here’s how Pennsylvania plans to use the SSBCI funding:

•  PA-SSBCI Revolving Loan Fund Program — $125.8 million. This program uses SSBCI funds alongside private funds to support small business loans to eligible borrowers, including socially and economically disadvantaged individuals.

•  PA-SSBCI Direct Venture Investment — $125 million. This equity capital program will help eligible startups access venture capital.

•  PA-SSBCI Diverse Venture Loan Program — $17 million. This program provides SSBCI funds to venture capital firms that make investments in Pennsylvania-based small businesses led by diverse individuals.

PA Microloan Lenders

Community-based nonprofits may offer microloans of up to $50,000 to small business owners in Pennsylvania, including microloans for women-owned small businesses. In general, microloans can range from $500 to $50K and may be available to startups.

Recommended: Small Business Grants in Georgia

Pennsylvania SMB Loans from Private Lenders

Banks, credit unions, and private lenders may offer different types of small business loans to Pennsylvania business owners.

Here are some of the funding products you may consider depending on your needs:

•  Commercial real estate loans

•  Equipment financing

•  Small business loans for startups

•  Working capital lines of credit

If you’re seeking financing for your business, SoFi can help. On SoFi’s marketplace, you can shop top providers today to access the capital you need. Find a personalized business financing option today in minutes.

FAQ

How do you get a small business grant in Pennsylvania?

You can apply for Pennsylvania small business grants, but there’s no guarantee you’ll get approved for one. You may have to submit a grant application as a qualified small business owner to be considered for a small business grant in Pennsylvania.

How hard is it to get a business loan in Pennsylvania?

You may have difficulty getting a small business loan in Pennsylvania if you have bad credit or insufficient business experience. You generally have to pay back business loans with interest.

What is the easiest SBA loan to get approved for?

There’s no guarantee you’ll get approved for any SBA loan, but SBA microloans may be one of the easier ones to get if you’re a new business owner. Startups may be eligible for SBA microloans of up to $50K. If you’re looking for a streamlined application process, SBA Express working capital loans are an option you may consider.

Photo credit: iStock/gsheldon

SoFi's marketplace is owned and operated by SoFi Lending Corp. See SoFi Lending Corp. licensing information below. Advertising Disclosures: SoFi receives compensation in the event you obtain a loan through SoFi’s marketplace. This affects whether a product or service is featured on this site and could affect the order of presentation. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

SOSB-Q224-1880351-V1

An owner financing a business for sale means the original owner will personally finance all or a portion of the purchase price. Rather than having to come up with the full amount, the buyer typically makes a down payment then pays the balance in monthly installments. The seller acts as a lender, even though they don’t actually deposit any funds into the buyer’s bank account.

Technically, the business hasn’t been 100% paid for, but the buyer is still able to immediately start running and managing it after the sale.

Read on for a closer look at how owner financing works, the pros and cons of this type of financing, as well as other loan options buyers may want to consider when purchasing a business.

What Is Owner Financing When Buying a Business?

Business owner financing (also referred to as seller financing) is when the original business owner offers the buyer a loan to cover all or some of the price of the business.

Generally, the buyer makes a down payment in cash as soon as the deal closes. The seller’s loan may cover the remaining amount of the sale price, plus interest, according to the terms set by the seller and agreed to by the buyer. If the seller’s loan doesn’t cover the entire cost of a business, buyers will often use another form of financing in combination with their seller’s loan.

If properly structured, seller financing can be a good fit for both parties. A buyer who may struggle with finding other financing sources can still become a business owner. For the seller, offering owner financing can make it easier to sell a business by expanding the pool of potential buyers.

How Does Owner Financing Work?

Business owner financing deals vary, but often they are structured in such a way that only a portion of the purchase is owner financed — meaning the buyer still needs to come up with a majority of the purchase price on their own. In some cases, however, the buyer will make a downpayment and the seller serves as the only lender for the remainder of the purchase price. Either way, a lawyer will typically draw up and file the terms of the loan in a promissory note, which is essentially a legally binding IOU.

Repayment terms for a seller financing loan tend to be similar to those of a business bank loan, with repayment lengths of five to and seven years, monthly payments, and interest (which may be the same or lower than bank prime rates).

The business itself may act as the only collateral, meaning that if the borrower defaults, the seller can reclaim the business and its assets, as well as control over its operations. Often, though, sellers will require additional collateral, usually in the form of a personal guarantee. That personal guarantee allows the seller/lender to seize and liquidate the borrower’s personal assets in case they fail to repay their debt.

Recommended: How Much Does It Cost to Start a Business?

Pros and Cons of Owner Financing a Business Sale

There are advantages and disadvantages to owner financing for both owners and buyers. Here’s a closer look.

For Buyers

Pros
From the buyer’s perspective, an owner financing business for sale can make a lot of sense. For starters, it can be easier to qualify for since the seller may have more flexible eligibility requirements than a traditional lender.

Another benefit is that the buyer doesn’t need to come up with the full asking price right off the bat. Even if the buyer does need an additional small business loan, it won’t have to be as large as it would be without owner financing.

In addition, the buyer can feel secure in knowing that a seller offering seller financing is confident that the business will generate sufficient cash flow to help the buyer repay the loan. What’s more, banks view seller financing as buyer equity, and may be willing to lend more money in a seller-financed business for sale transaction.

Also, the purchase agreement is typically negotiable. Sellers offering owner financing know that both parties must agree to every aspect of the purchase deal for the sale to go through.

Cons
On the downside, a large portion of the purchase price may still need to come from either cash or by getting a small business loan. Very few sellers are willing to do 100% owner financing because of the amount of risk associated with this type of purchase.

In some cases, the seller may raise the purchase price when they are offering seller financing because they are likely to have more than one interested buyer. In addition, they may request collateral (in addition to the business itself) or a personal guarantee. That means that, should you fail to repay the loan, you could lose valuable business or personal assets.

Finally, there may be some transition challenges. The seller may provide training to put the buyer in a position to succeed at running the business. This training could potentially be insufficient, or the buyer might be overly involved or interfere with operations, which can be frustrating for the buyer.

Recommended: What to Know About Short-Term Business Loans

For Sellers

Pros
A major advantage for sellers is that they can often make more money on the sale of their business with owner financing. One reason is that they can often increase their asking price due to an expanded buyer pool. Any seller willing to advertise “Owner Financing Business For Sale” is likely to get more offers than they would without it. On top of that, they can charge interest on the financing.

If an owner is retiring, seller financing may be appealing because it offers a form of regular passive income.

Cons
On the downside, not getting all the cash for the sale up front means the seller doesn’t have that money to invest elsewhere, which could cause them to lose out on investment and other financial opportunities that could pay off down the line.

Also, there is risk involved in seller financing. If a buyer defaults on the loan and the seller doesn’t have the proper protections in place, the seller could lose that money with no ability to recoup the loss. Even with protections in the palace, legal intervention can be costly.

Other Ways to Buy a Business

Seller financing isn’t the only way to purchase a business. And, even if you do use seller financing, you may still need to find another source of financing to complete the deal. Fortunately, there are various kinds of business loans that can be used to buy a business or franchise. Here are some options to consider.

Business Acquisition Loans

A business acquisition loan is designed to help you purchase an existing business. These bank loans can also be used to buy assets from a business or buy out a business partner. They are typically structured as term loans, in which you repay the borrowed funds, with interest, over a set period of time. Loan amounts, interest rates and repayment terms vary by lender.

Although you may ask for a specific loan amount, some lenders will only offer you a percentage of purchase price and require that you supply the remaining percentage as a down payment. In addition, the lender may use a business valuation, along with other factors, when determining the loan amount to offer.

Business acquisition loans can be difficult to qualify for, and collateral may be required to secure your financing. In some cases, tangible assets from the company you’re looking to purchase can serve as collateral for the loan.

SBA Loans

U.S. Small Business Administration (SBA) loans are offered by a variety of SBA-approved lenders. The SBA guarantees these loans in case a borrower defaults, which lowers risk for the lender. As a result, these loans typically come with attractive rates and terms. The SBA 7(a) loan is one of the most common SBA loans and can help cover the costs that come with purchasing an existing business.

While qualification requirements for SBA loans tend to be strict, it is often easier to get an SBA loan to buy a business than to start one because lenders can evaluate the financials of the business you’re buying.

Private Small Business Loans

Getting a small business loan through a private lender can be easier than an SBA loan. Plus, borrowers often receive their money faster with a private small business loan than they would with an SBA loan. Interest rates may be a little higher, but the overall process is usually much smoother.

Recommended: GAAS vs. GAAP

Online Business Term Loan

Alternative online lenders offer a variety of loan products to small business owners, including term loans, which you can use to buy a business.

These private lenders generally have less stringent qualification requirements than traditional banks. As a result, you may find it easier to get approved for a business loan with an online lender than with a bank or credit union if you’ve never owned a business before or have less-than-stellar credit.

Online lenders also typically have a much faster underwriting process. Some will vet your application and, if you’re approved, issue funds as soon as the same business day. However, these loans tend to come with higher interest rates and shorter terms than term loans through a traditional bank, credit union, or SBA lender.

Recommended: Typical Small Business Loan Fees

The Takeaway

Owner financing is a financing method that allows a buyer to purchase an existing business without having to pay the full asking price up front. Owner financing sales often still require the buyer to come up with a large portion of the sale price, meaning you may still need to find a small business loan.

If you’re seeking financing for your business, SoFi can help. On SoFi’s marketplace, you can shop top providers today to access the capital you need. Find a personalized business financing option today in minutes.

FAQ

Is owner financing a business a risky idea?

Not necessarily. As with any financing deal, there are some risks involved on both sides of the deal. For the seller, there’s always a chance the buyer will default on the loan. For the buyer, owner financing carries the same risks as any small business loan. Should you run into trouble making your payments, you could lose any assets you put up as collateral. If you sign a personal guarantee, your personal savings or home could be at risk.

How does selling a business with owner financing work?

Business owner financing can be structured in a variety of ways depending on the needs of the seller and buyer. Typically, the buyer will need to come with a significant portion of the purchase price (via cash and/or an outside loan). The seller will then finance the rest of the cost. There is usually a set loan term, interest rate, and monthly payment amount. For the most part, owner financing works in a similar way to standard business loan.

What are the disadvantages of owner financing a business?

For the owner, financing the sale of their business carries risks. If the buyer defaults on payments, there could be a lengthy legal proceeding, which generally comes with costs. In addition, seller financing ties up capital that they could use for other investments.

For the buyer, seller financing often comes with a higher purchase price, since many buyers may be interested. In addition, buyers often need to pay a large portion of the asking price up front. As a result, they may still have to take out a business loan. Sellers may also require collateral or a personal guarantee.

Photo credit: iStock/Gwengoat

SoFi's marketplace is owned and operated by SoFi Lending Corp. See SoFi Lending Corp. licensing information below. Advertising Disclosures: SoFi receives compensation in the event you obtain a loan through SoFi’s marketplace. This affects whether a product or service is featured on this site and could affect the order of presentation. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SOSB-Q224-1874300-V1

Commercial real estate crowdfunding is a way for real estate companies to raise money, not by asking one investor for a large investment but by reaching out to a large number of investors who each contribute a small amount of money. This method of raising capital is done using an online crowdfunding portal.

If you’re considering alternative options for capital, here’s what you need to know about crowdfunding for commercial real estate.

What Is Commercial Real Estate Crowdfunding?

Commercial real estate crowdfunding uses crowdfunding to raise money for investments in real estate assets. By using an online crowdfunding platform (such as RealCrowd, CrowdStreet, or RealtyMogul), real estate developers can gain access to large networks of potential investors, including friends, family, colleagues, as well as the general public.

This type of crowdfunding is similar to equity crowdfunding in that an investor can buy into a commercial property (such as a multifamily apartment building, retail center, or office building) and become a shareholder. Rather than buying an entire property, the investor can earn a portion of the profits generated from the real estate investment. For example, any revenue generated from the building’s rental income or any proceeds from the sale of the building would be shared with the investors.

Real estate crowdfunding gives developers an alternative to traditional methods of financing, such as bringing in an accredited investor or getting a small business loan. It can also be a way to capitalize projects they may have had difficulty funding through more traditional channels.

What Is Crowdfunding?

Crowdfunding is when a “crowd” funds a project or business, rather than one or two major investors. Crowdfunding makes use of social media and crowdfunding websites to bring investors and entrepreneurs together and expand an entrepreneur’s pool of investors beyond the traditional circle of owners, family members, and venture capitalists.

In some cases, people who give to a crowdfunding campaign receive nothing in return (called donation crowdfunding); in others, they receive a reward based on how much money they give to a campaign, such as a T-shirt or the product or service itself (called rewards crowdfunding).

The two main types of crowdfunding used for real estate deals are debt-based crowdfunding, in which donors provide a loan to a company, and equity crowdfunding, in which donors receive equity in the company. (More on those below.)

How Does Commercial Real Estate Crowdfunding Work?

Commercial real estate crowdfunding deals can be divided into two main categories. Here’s a closer look at each.

Equity Crowdfunding

Equity crowdfunding is the most common type of commercial real estate crowdfunding deal. With this set-up, investors become shareholders in a specific property or group of properties. The stake they receive is proportional to the amount they invest. Returns come in the form of rental income (minus expenses of maintaining and managing the property) or, if the property is sold, a share of the appreciated value.

Debt Crowdfunding

With real estate debt crowdfunding, the investor essentially becomes a lender to the property owner and the owner must pay the investors back, plus interest. Owners typically make interest and principal payments on a set schedule, often quarterly or monthly. Debt financing deals typically have a pre-set payoff date, which can range anywhere from six to 24 months. Companies may turn to debt crowdfunding when they are unable to qualify for traditional small business loans.

Recommended: Rewards-Based Crowdfunding

Pros and Cons of Commercial Real Estate Crowdfunding

Using crowdfunding to raise capital for a real estate deal has its pluses and minuses. Here’s a look at how they stack up.

Pros

Real estate crowdfunding allows you to widen your potential investor base. It can also help you raise capital for projects you might have had difficulty funding through more traditional channels.

In addition, running a crowdfunding campaign can be a good way to promote your business and create buzz about your brand. The online community you build can also be a source of valuable feedback, helping you to identify and address any business flaws.

Another upside is that real estate crowdfunding websites tend to be user-friendly and make it relatively easy to launch and run fundraising campaigns. This allows you to reach a large audience without extensive effort or investment.

Cons

If you choose equity crowdfunding, you will need to give up some ownership of your business, and also share any profits. If you choose debt crowdfunding, you will need to repay the funds plus interest (however you will retain full ownership and won’t need to share profits).

There are also costs involved in crowdfunding commercial real estate. Crowdfunding platforms typically take a percentage of any money raised, and may charge other fees. And, with many sites, you can’t keep any of the investments you raise unless you reach your minimum funding goal.

Finally, this form of real estate investing has become popular in recent years. As a result, it can be difficult to stand out on a platform and attract investors.

History of Commercial Real Estate Crowdfunding

Commercial real estate crowdfunding is a relatively new phenomenon. Prior to 2012, real estate companies could not publicly solicit investors to invest in their real estate projects. In fact, they had to demonstrate they had a “preexisting relationship” with a potential investor before they could invite them to invest. As a result, a developer’s funding network was only as large as their personal connections.

This changed when Congress passed the Jumpstart Our Business Startups Act (JOBS Act) in 2012. After this law passed, real estate companies were able to advertise investment opportunities publicly.

The JOBS Act also prompted the Securities and Exchange Commission (SEC) to revise its regulations to allow real estate developers to sell securities in real estate deals. Just as someone would purchase stock in a company, they can now buy shares in commercial real estate deals. The investment is governed by SEC regulations just as they would be if the investment was a traditional security.

These changes paved the way for real estate crowdfunding sites to begin operating. There are now numerous sites that allow accredited investors to buy into a real estate deal for as little as $10,000 or $25,000. There are also platforms that have even lower thresholds and offer deals accessible to non-accredited investors. Many developers now crowdfund investment in their deals through these platforms.

The Takeaway

Commercial real estate crowdfunding is an investment avenue that uses crowdfunding, or sourcing capital from a “crowd” of investors, to raise money for investments in real estate assets like multifamily apartment buildings, retail centers, office buildings, and other types of real estate.

Whether you’re just starting a real estate business or have been investing in commercial property for years, these platforms offer an alternative way of funding your deals.

If you’re seeking financing for your business, SoFi can help. On SoFi’s marketplace, you can shop top providers today to access the capital you need. Find a personalized business financing option today in minutes.

FAQ

What are some possible downsides to crowdfunding for commercial real estate?

For business owners, there are numerous fees to consider. There is also a lot of competition for investors, which means that running a successful crowdfunding campaign can take a fair amount of time and effort.

Is crowdfunding for real estate even legal?

Yes. The Jumpstart Our Business Startups (JOBS) signed by President Obama in 2012 loosened regulations instituted by the Securities and Exchange Commission (SEC) on small businesses. Real estate crowdfunding is now completely legal.

Do funds from crowdfunding have to be paid back?

It depends on which type of crowdfunding platform you use. The funds you raise on an equity-based crowdfunding site do not have to be paid back. With this model, individuals invest money in exchange for a share of your business (and a portion of its profits). With debt-based crowdfunding, however, contributors to your campaign are acting as lenders, and you need to repay the funds, plus interest.

iStock/CHUNYIP WONG

SoFi's marketplace is owned and operated by SoFi Lending Corp. See SoFi Lending Corp. licensing information below. Advertising Disclosures: SoFi receives compensation in the event you obtain a loan through SoFi’s marketplace. This affects whether a product or service is featured on this site and could affect the order of presentation. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

SOSB-Q224-1883496-V1

Every business, regardless of its size, generally goes through five stages of business growth — development, startup, growth, maturity, and renewal or decline. Each stage in a company’s lifecycle brings its own unique challenges and opportunities, and each is considered a healthy part of the business cycle.

By learning about each of the growth stages, you can identify where your small business currently is in the cycle and develop the right business growth strategy. Read on for a closer look at the five key stages of the business lifecycle and the steps you can take to increase your odds of success along the way.

1. Development

The first stage of small business growth actually begins before you start your business. In the development phase, you’ll be identifying an unmet need in a specific market and doing all the research necessary to get your business off on the right foot.

How to Support a Business in This Phase

It’s all about laying the groundwork here. You’ll want to create a detailed business plan that identifies exactly who your business will serve, the products or services your business will provide, the marketing tools and strategies you’ll use, your budget for the first year, and how you will fund your business.

If you don’t feel confident yet as a business owner, it may be beneficial to take business courses or workshops to ensure you’re ready to launch.

You’ll also want to consider whether you’ll want to hire help. Having part-time, full-time, or even freelance employees will add to your startup costs but can help you get your business up and running faster.

When to Go to the Next Phase

Once you have a plan in place for your business and the funds you need to launch, it’s time to move to the next phase.

How to Get to the Next Phase

This may be the time to quit your regular job so you can fully focus on your new endeavor. Alternately, you might decide to continue working at least part time while you launch. You can always quit once you’re making enough to replace your full-time salary.

2. Startup

Though often considered the riskiest stage of business growth, the startup phase can also be one of the most exciting. This is when your idea is put out into the world and you start selling.

During the startup stage, there’s lots to be done: You’ll need a website, office space, and employees, as well as a product or service to sell.

How to Support a Business in This Phase

Hopefully the budgeting and finance work you did in the development phase ensures you have enough capital to cover your startup costs, but if you find yourself coming up short, you may want to weigh the pros and cons of a small business loan. Some lenders charge high interest to loan to startups, so determine whether that’s a good tradeoff for getting the capital you need.

This is also a period of trying things out. You can test your product and target market, as well as different marketing channels. If something doesn’t work, you can tweak it and try again.

You may also want to spend time hiring people who can best help your company grow. Identify the skills each role needs and then carefully choose the best candidate.

Recommended: Steps to Writing a Business Plan

When to Go to the Next Phase

As one of the early stages of business growth, you may be in the startup phase for a while. You’ll know it’s time to move on when your business starts to settle and profits become steady.

How to Get to the Next Phase

Once you’re no longer struggling financially and can confidently project sales for the future, it’s time to get ready to grow your business.

3. Growth

After being in business for a few years, your market share and customer base is now experiencing rapid growth. This presents a variety of opportunities to expand your business. This could mean adding another location to the mix, hiring more staff, or expanding your product line.

How to Support a Business in This Phase

It’s important to keep an eye on the future while also maintaining day-to-day operations. You’ll want to set short- and long-term goals that make the most sense for your business and use your resources effectively. You’ll also need to make sure you have enough working capital to both meet your current financial obligations and also invest in new opportunities as they present themselves.

When to Go to the Next Phase

Once you’ve achieved your short- and long-term goals for growing your business, or feel you’ve grown as much as the market will allow, you may be ready to enter one of the stages of small business growth for the established, successful company.

How to Get to the Next Phase

When your focus pulls back from aggressively growing your business, it’s time to move into the maturity phase.

4. Maturity

One of the last of the stages of business growth is maturity. This happens when your business is stable and profits are steady. You can rely on revenues growing moderately year to year, and you confidently make business decisions.

How to Support a Business in This Phase

In this phase, you’ll want to keep on doing what works. At the same time, you want to be careful not to succumb to the biggest risk of the maturity phase — becoming stagnant.

Even as a mature business, you don’t necessarily want to sit still. It can be wise to continue looking for opportunities to expand your customer base or develop new products or services that tap a new market.

When to Go to the Next Phase

For some business owners, the maturity stage may bring thoughts of selling, merging, or buying another company. As you question “what’s next for my business?” you may be ready to enter the next phase.

How to Get to the Next Phase

Something has changed in your business, whether it’s a lack of desire to continue it or the fact that your product may be less relevant (think: camera film in a digital world). It’s time to consider the best next steps for your business.

5. Renewal or Decline

Now is the time for the hard questions: Do you need to close down your business? Is it time to sell? Should you consider a merger or acquisition? Can you come up with innovative ideas that will inject new life into your business?

How to Support a Business in This Phase

The answer lies with your personal and professional goals. If you feel ready to retire and focus on other areas of your life, you may decide to sell the business or close it down. If you’re not ready to step away from the business, on the other hand, you might decide to invest money in developing or acquiring new products or connecting with a different target market.

Pros and Cons of the 5 Stages of Growth as a Model

Identifying Which Stage Your Business Is In

Throughout the life of your business, you will likely be in one of these stages of business growth. Identifying which one your business is currently in can help you assess and solve current challenges, as well as strategize for how you will move to the next business stage.

The Takeaway

While every business is unique, all businesses tend to experience common problems and opportunities that arise at similar stages in their development. Knowing where your company is in the business cycle can help you assess and solve current challenges, develop growth strategies, and plan for the future.

If you’re seeking financing for your business, SoFi can help. On SoFi’s marketplace, you can shop top providers today to access the capital you need. Find a personalized business financing option today in minutes.

FAQ

Do you have to go through all five stages of business growth?

Generally, every business will go through each of the five stages of business growth, though how long a business spends in each may vary.

What are the different stages of business growth?

The five stages of business growth are: development, startup, growth, maturity, and renewal or decline.

Is starting up a stage of business growth?

Yes. The startup phase is the second stage of business growth. It occurs after you’ve developed your business idea and before you’ve reached the growth stage.

Photo credit: iStock/LaylaBird

SoFi's marketplace is owned and operated by SoFi Lending Corp. See SoFi Lending Corp. licensing information below. Advertising Disclosures: SoFi receives compensation in the event you obtain a loan through SoFi’s marketplace. This affects whether a product or service is featured on this site and could affect the order of presentation. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SOSB-Q224-1883481-V1