Commercial Construction Loan: What They Are and Where to Get One

The commercial construction loan available for construction could assist your business in financing the cost of building. SBA 504 loans can be one alternative.

The commercial construction loan is one business loan that helps your business pay for the costs of building or renovating buildings. These construction business loans to buy the land, purchase materials, and even pay your employees.

The commercial loan may aid in keeping your balance sheet in check when building, as lenders typically accept interest-only repayments during construction. But the costs will increase dramatically after the construction is completed. Be sure to have a plan to deal with the higher payments, which could include refinancing your loan.

How do commercial construction loan work?

1. Create a drawn plan together with the lender. Most likely, you’ll be working with your lender to link the loan payments to specific events within the construction process. For instance, you may be able to receive a particular portion of your loan only after an examination is completed.
2. Make payments during construction. When your building is in progress, Most lenders will allow you to pay interest only and only for the amount you have drawn up to date.
3. The remaining balance of the loan will be once the construction has been completed. Many construction loans come with shorter terms, perhaps a couple of years. If you’re not able to pay back your loan within the time frame you have set, then you’ll have to be able to consolidate the loan or get commercial real estate loans to pay the balance. Some commercial construction loans are “construction-to-permanent” loans. In these cases, you’ll be able to continue making payments to the lender over a long period.

How much will commercial building loans set you back?

In general commercial construction, lenders do not fund 100% of a construction project. What they finance, known as the loan-to-cost ratio or loan-to-value ratio, typically ranges from 70% to 90 90%. It is necessary to pay for the remaining cost of the project through a down payment.

Processing fees, guarantees, and project review costs are a way to raise the cost of business loans for construction. Some lenders will include these costs in the loan, meaning you can pay for them in the future instead of making cash available upfront.

Where can I get a commercial construction loan?

It is possible to get a commercial construction loan through a bank, credit union, or private lender, sometimes a hard money loan. A few SBA-backed loans can be obtained by financial institutions and used to construct.

The ideal business loan for construction will provide the funding required on terms that suit your business while offering the lowest interest rate and costs.

Credit unions and banks

Banks and credit unions generally offer more affordable rates and conditions than other lenders for business. However, the loans banks and credit unions provide tend to be the most difficult. You’ll probably need great credit as well as a lengthy period of the business.

SBA loans

SBA loans are usually managed by credit unions, banks as well as other institutions of finance. However, they’re insured by the U.S. Small Business Administration and are, therefore, more secure for small-business lenders.

The SBA 504/CDC loan will help you acquire and renovate fixed assets like homes. You can get the amount of $5 million. You can repay in a set period of 10, 20, or 25 years. SBA 504 loans typically come with one of the lowest rates of interest available. The construction property serves as collateral.

SBA 504 loans are typically structured as term loans, unlike commercial loans. Instead of making only interest-only payments during the construction phase, you’ll be making periodic payments that are fixed throughout the term that the loan is in force. However, there could be some exceptions, so be sure to inquire with your lender.

Regionally specific Certified Development Companies can grant SBA 504 loans. You can visit the SBA’s website to find one near you.

You may also use the SBA 7(a) loan to finance construction projects. Some lenders provide 7(a) loans that function similarly to construction loans throughout your project. That is, they pay through disbursements, and you’ll do not have to pay any interest up until the project is complete. If you’re looking to obtain this kind of loan, you should have frequent discussions with your lender throughout the process of applying to ensure that you know the loan’s terms.

Hard money lenders

The lenders who provide hard money are privately owned businesses that offer short-term loans to commercial projects. In general, these lenders can approve and fund your loan fast and could be able to do so in several days. They might also have less stringent qualifications than banks and SBA lenders, making them a viable alternative if you’ve got less than ideal credit.

Because loans with hard money are riskier and riskier for banks, they’ll be more costly for you. They’ll likely be accompanied by more expensive interest rates and longer times than other financing options.

Alternatives to business construction loans

Commercial construction loans can be beneficial when developing from scratch. However, if you’re purchasing an existing property or planning an upgrade, you should consider these options.

If you’re purchasing the property, you already own: Real estate commercial loans are sometimes referred to as commercial mortgages due to their structure similar to mortgages. You’ll pay a downpayment on the property and then repay this loan with time using the property as collateral. They are ideal for buying homes that don’t require significant changes.

If you’re planning to renovate a home, you already have: SBA 504 loans are still an option for significant renovation projects due to their low-interest rates and longer repayment time. If you’d like to make minor improvements in the future or don’t want to endure the lengthy application process for the SBA, A small-scale line of credit could provide more flexibility.