December 16, 2021
Why Entrepreneurs Benefit From Commercial Construction Loans
What is a Commercial Construction Loan?A commercial construction loan is versatile and can be used to fund various expenses. You can take one out as a contractor or small business owner to cover the cost of your construction project or other expenses. In many cases, a commercial loan for a construction business works a lot like a business line of credit. You can withdraw money whenever you need to complete each portion of the project, and you’ll only pay interest on the amount you borrowed. Some construction loans will require you to repay the balance entirely once the project comes to an end.
Types of Commercial Construction LoansThere are many types of loans that can be used for commercial construction costs, such as:
- SBA CDC/504 Loan: This program offers competitive interest rates and low down payment requirements. If you go this route, a SBA-approved Certified Development Company will cover 40% of the costs to build a new space, renovate an existing one, or purchase or improve land. Depending on your credit score and finances, you may be eligible for up to $5 million.
- SBA 7(a) Loan: The SBA 7(a) loan is one of the most popular SBA loans because it can be used to purchase or construct commercial real estate. It offers up to $5 million in funding with repayment terms of 25 years. There is also a down payment requirement that ranges from 10% to 20%.
- Bank Loans: Many banks offer term loans that you can use for commercial construction. Loan amounts, rates, repayment terms, and down payment requirements vary from lender to lender. Typically, however, most lenders offer maximum repayment terms of 25 years and require a 10% down payment.
- Mezzanine Loans: If you’re having trouble qualifying for other commercial construction loans, a mezzanine loan may make sense. It’s secured to stock, meaning if you default, the lender may convert an equity stake in the property. You’ll enjoy greater leverage and may achieve a loan-to-cost ratio of up to 95%.
Uses for Commercial Construction LoansCommercial construction loans are flexible, meaning you can use them to cover a variety of expenses such as:
- Starting or Expanding a Construction Business: Whether your goal is to start a construction business from scratch or grow the one you currently have, a commercial construction loan is invaluable. It can provide you with the funds you need to meet your unique goals.
- Purchasing or Leasing Equipment: It’s highly likely that you need heavy machinery, equipment, and tools to run your construction business. You can use construction to purchase or lease excavators, bulldozers, pavers, dump trucks, and anything else necessary to complete your projects.
- Hiring Workers: Your crew is your most important asset. After all, if you didn’t have experienced workers, you wouldn’t be able to meet your client’s needs and operate. With a construction loan, you can hire and train a skilled crew.
- Purchasing or Renovating Commercial Real Estate: Depending on the nature of your business, you may have construction projects that require you to purchase or renovate commercial spaces. For instance, you might partner with a developer to transform an old car dealership into a restaurant. A construction loan can help you finance this type of project.
- Operating Expenses: If you’re facing cash flow issues, you might turn to a commercial construction loan to cover day-to-day expenses. These may include payroll, inventory, marketing, taxes, and insurance premiums.
How to Apply for a Commercial Construction LoanIf you’re interested in a commercial loan for your construction company, follow these steps.
- Shop Around: Not all commercial construction loans are created equal, which is why it’s a good idea to shop around and compare your options. Compare the rates, terms, and down payment requirements of all the loans you find.
- Apply: Once you discover the ideal loan for your unique needs, you’ll need to begin the application process, which may be online or in person. You’ll likely be asked to provide a business plan and specific details about your project, including a comprehensive plan with specs. You might also need personal and financial documents like tax returns, balance sheets, and income statements.
- Close: Upon approval, you’ll transition into the closing process. This is where you’ll receive the loan agreement that will outline all of the important milestones and dates. It will be your job to carefully review it and ask the lender for clarity on anything that doesn’t make sense.