Commercial construction loans are common in the industry. They’re a type of business loan that helps your company cover costs during a renovation or construction project. You can use a commercial construction loan to acquire land, buy materials for the project, and/or pay your construction crew.
Obtaining a commercial construction loan can make things much more manageable during a build. Why? Because most commercial lenders accept interest-only payments during a construction job. These loans can also help you manage the increasing costs associated once the build is complete.
But how do commercial construction loans work?
We’ll answer this question and provide further information about commercial construction loans below:
How Commercial Construction Loans Work
Contrary to most other loans, a commercial construction loan is unique: Instead of receiving the full amount in one lump sum, the lender and borrower create a draw schedule that indicates when the lender releases parts of the payment.
When Are Funds Dispersed?
A draw schedule can be considered a schedule that identifies when the builder will receive payments throughout the construction process. The schedule of payments may follow project milestones, like clearing the site, pouring the foundation, and constructing the frame of the building.
Before the milestone is reached, the lender may send an inspector to confirm that the work has been completed before releasing funds. This pattern will continue until the full amount of the loan has been distributed.
How Is the Loan Paid Back?
Much like other loans, the borrower is responsible for paying the interest on the loan amount as well. However, the interest is only paid once the amount has been released. At the end of the construction project, the borrower must repay the full loan amount.
If the borrower cannot pay the amount back in full, they can use the property from the build as collateral to get a commercial mortgage. With those funds, the borrower can repay the commercial construction loan.
The Application Process for Commercial Construction Loans
What the Lender Will Want To Know
The more detailed information you offer your lender, the better the outcome. They’ll want to know everything related to your business, such as your specific industry, financial records, current projects, operations, etc.
The lender will also want more information about the commercial construction project you need financing for. You’ll also need to prepare projected costs, specs, designs, and estimated payments for commercial construction contractors, materials, and other expenses.
When meeting with your lender, make sure to have the following:
- Balance sheets
- Bank statements
- Income statements
- Profit and loss statements
- Debt schedules
- Tax returns
Most lenders want you to have a credit score of 670 or more. They’ll also look into bankruptcy claims, foreclosures, and previous construction loans.
When You Can Expect Approval/Rejection of Your Application
The loan application can take up to several weeks for approval or rejection.
What Commercial Construction Loans Can Be Used For
Receiving a commercial construction loan is good for purchasing or leasing heavy machinery, tools, and other equipment needed for the project. For example, if you don’t have the cash flow to purchase a new dump truck halfway through the build, you can use the funds from your loan.
When constructing a commercial building, you may need to purchase land. Maybe you want to turn an empty lot into a gym or a retail store into a restaurant. A commercial construction loan can help you fund the project from the very beginning.
You’re going to need an extra set of hands, no matter the size and scale of the construction project. A small construction loan can help you hire the help you need to get the job done on time.
Bidding on Projects
Thinking about bidding on a project? A construction loan can get you the funding you need while you bid on potential construction projects. You can sit on the money while you take the time to strategically bid on prospective construction projects using your knowledge of the industry. That way, you have the funds ready if your bid is accepted.
Covering Payroll Expenses
The day-to-day costs associated with a construction project can add up. Construction loans can help you out by providing the money you need to cover payroll, taxes, insurance, and other operating costs.
Risks Associated With Commercial Construction Loans
The Risk of Cost Overruns and Budget Constraints
Sometimes unexpected costs can impact your overall budget during a construction job. Unexpected expenses could potentially delay the project during the build. The construction crew might also come across unexpected repairs or other unforeseen factors that may increase the budget, making it difficult to complete the project on time.
The Potential for Delays and Other Issues
Delays may negatively affect your loan and repayment, especially if you have a draw schedule in place. As mentioned, many lenders will distribute payments at specific milestones. If you’re unable to make it to the milestone due to an unforeseen delay, you may not receive the next portion of your construction loan, meaning you’ll require cash flow. This problem could affect your loan repayment cost in the end, as well as the amount of interest you’ll need to pay.
The Impact of Interest Rates on the Overall Cost of the Loan
The more money you ask for in a commercial construction loan, the higher the interest rates. You may find yourself struggling to keep up with the interest payments, especially if you run into delays and issues during the project.
By now, you can see the amount of work required to obtain a commercial construction loan. Even when your application is accepted, you’ll need a committed crew that’s professional, prompt, and dependable.
That’s why you can rely on our Dub-L-EE Construction crew. With years of experience and hundreds of commercial building projects, we have the skills needed for any project, large or small. We’ve worked with a wide range of clients, from NASA to smaller businesses across New Mexico. Let’s make your construction project happen. Contact us today!