Commercial construction loans: What are they, why do I need them, and how do I get them?
What Is a Commercial Construction Loan?
A commercial construction loan is used to finance the costs associated with the construction or renovation of a commercial building. Its funds are often used to pay for labor and materials for constructing a new property, land development purchases, and renovating existing properties.
Why Take Out a Commercial Construction Loan?
Business owners should apply for a commercial construction loan if they plan on renovating an existing property or building new ones.
These projects are expensive and can cost hundreds of thousands to millions of dollars. It’s not typical for a growing business to have this type of cash flow, so they usually turn to a commercial construction loan for proper funding. Lenders pay for labor, materials, and land development so you don’t have to cover the costs yourself.
Benefits of Commercial Construction Loans
You Only Pay the Interest Amount
Most lenders only require you to pay the interest on the withdrawn amount. They won’t ask you to pay the capital during the construction of the project. You’re only responsible for repaying the loan once the project is complete.
An Easy Approval Process
It’s easier to get approved for a construction loan from private lenders than to go through a regular bank. In fact, most real estate developers prefer construction loans over funding from other financial institutions.
Most construction loans are customizable, especially when you receive them from a hard-money lender. Financial institutions do a good job of tailoring funding around a project’s specifications, but, unlike most banks, a hard-money lender keeps flexible loan terms and guidelines. Since they’re smaller shops, they can work with you on a more personal level to align schedules and interest payments to each party’s specifications.
How to Secure a Commercial Construction Loan
Securing a commercial construction loan can be a difficult process to navigate. Fortunately, we can break down this lending procedure into five simple steps.
1. Define Project Specifications
Before you fill out an application, make sure to submit a record of all the critical project specifications. Banks and third-party lenders need a list of the following information:
- Timeline and construction plans
- The location and all association land costs
- A Complete project budget for construction costs, equipment costs, title work, legal fees, permits, municipal fees, and insurance payments
2. Submit a Proposal
Once lenders have all the critical information, they will prepare a few proposal options to review:
- Five-year loans with a 20-year amortization: Owners must provide at least 20% of the equity, while the lender will take care of the remaining 80%.
- Small Business Administration (SBA) Loan: If your firm qualifies for a small business loan, you may be able to reduce equity to 10% so the lenders can handle the remaining 90%. Keep in mind that the federal government provides backing for these loans, so they generally take longer to approve and include additional fees.
- Loan covenants: Some lenders offer this option as a forgiveness program that balances debt service ratios with prepayment fees. This program encourages building owners to keep the original loan with your personal guarantees. If considering this option, make sure to review the proposal with an attorney and CPA to ensure you fully understand payment obligations.
3. Appraisal and Acceptance
Once you accept the proposal, the lender will order an appraisal. This is a critical step that finalizes the loan agreement. If the appraisal meets or exceeds the total project cost, you continue moving toward closing. If it comes below that threshold, you need to consider revising your request or providing more equity to make up the shortfall. Overall, expect the process to last at least four to six weeks.
4. Complete Title Work
For assurance purposes, you need to present a clear title to your lender. If any issues are identified during the title search, make sure to resolve them before closing.
5. Close Your Loan
Finally, close the loan. All you have to do is sign off on the paperwork and start the construction.
Simplify Loan Lending With Skilled Services
When it comes to new construction and remodeling, we know what it takes to make a project successful. We’re here to help streamline the lending process so you have funding for any initiative. Our experts work with you to help you secure the right financial support. Whether it’s a building expansion or add-on, Skilled Services can set you up with the best lenders.
Contact us to get started with your free consultation.