Construction Loans

Commercial Construction Financing

A commercial construction loan is a loan type that helps your business include the costs involved with constructing or renovating buildings. The funds are able to be used to acquire land, purchase materials and cover the payroll for construction crew.

Because lenders usually allow interest-only payments for the duration of construction, a commercial construction loan can make it easier to keep your balance sheet under control during a building project. However costs rise significantly as soon as construction is finished. Given that's the process one has to be organized to deal with the higher payments. This may include the possibility of restructuring the loan through a refinance.

    The way commercial construction loans work

  1. Make an agreement when the builder will be paid for their work with your lender. Generally, you'll work with your lender to bind loan disbursements to certain phases in your construction project. One example is you may receive a specific percentage of your funds only once a particular inspection is complete.
  2. Schedule payments throughout construction. During the building of your project, the majority} of lenders will allow you to make interest-only payments on the balance you made a draw on.
  3. Repay the full amount of the loan once construction is completed. Most construction loans have repayment terms of one to three years maximum. If you are unable to repay your loan within that time frame, your options are to get a commercial real estate loan or refinance the loan to pay the balance off in full. Fortunately, some commercial construction loans are structured as "construction-to-permanent" loans. With a loan like this, you'll proceed to make payments to the same lender for a much longer term such as 10-20 years.

What's the amount that commercial construction loans cost?

Typically, commercial construction lenders are not going to fund 100% of a project. They will finance the loan-to-cost ratio or loan-to-value ratio which usually varies from about 70% up to 90%. You'll have to include the expense of the remainder of the project, normally by making a down payment.

Items that can make construction business loans more expensive are any guarantee fees, processing fees and project review fees. Rather than paying these fees out of pocket upfront some lenders give you the option to include these fees in the loan which allows you to pay them them off in the loan.

Which lenders offer commercial construction loans?

Banks, credit unions, commercial mortgage brokers, or private lenders also referred to as a hard money lenders are the sources. It's worth noting that SBA loans, which are issued through financial institutions, may be utilized for construction as well. The best construction loan provides you the financing that offers the best terms for your business with the best available interest rate and costs.

Banks and credit unions

Overall, research has shown that banks and credit unions offer the best rates and terms than other business lenders for construction projects. Likewise, securing funding from banks and credit unions tends to be the most difficult to qualify for. To qualify excellent credit and multiple successful years in the same business are required.

SBA loans

Banks, credit unions and other financial service companies often offer SBA loans. A huge benefit is they're guaranteed by the U.S. Small Business Administration, which makes them significantly low risk for SBA lenders.

SBA 504/CDC loans are created for the purchase and reconstruction of fixed assets such as real estate properties. The loan allows a business to get funding up to $5 million and repay it on an agreed fixed term of either 10, 20 or 25 years. A great feature of the SBA 504 loan is it usually has among the lowest commercial loan interest rates available. The lender's concern of collateral is taken care of with the property being built.

In nearly all instances, SBA 504 loans are set up similar to long term loans, not like commercial construction loans. Rather than making interest-only payments while under construction, you'll make fully amortized fixed payments throughout the life of the loan. Always clarify terms with your lender to make sure.

Another SBA loan you can use for construction projects is the SBA 7(a) loan. Some lenders may offer 7(a) loans that are created similar to construction loans while under construction. Disbursements are paid and you only have to make interest-only payments up to the point construction is completed.

Overview of SBA 7(a) for construction

Hard money lenders

Hard money lenders are private companies that offer short-term financing for commercial construction projects. The advantage of hard money lenders is they can approve and finance your loan much quicker than a bank or credit union usually within a week versus 30-90 days. They may also have a great deal less rigid qualification requirements than banks, credit unions or SBA lenders, making these type of loans a viable choice if your credit is not strong.

Because of less requirements and lower credit ratings, hard money loans come with more risk for lenders which is why they'll likely have a higher interest rate and be more expensive for you.

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