Commercial construction loans are a great way to finance projects such as new retail stores, restaurants, storage facilities, office space, and more. There are many options when it comes to financing a commercial construction loan, but the basic structure is the same.
The key to a successful commercial construction loan is having an experienced lender who understands your needs and can provide you with the best terms possible. The first step in finding that right lender is by researching lenders in your area. You can use a free Commercial Construction Loan search at https://www.fundingcircle.com/us/.
What Is A Commercial Construction Loan?
The first thing we need to clear up is the difference between a commercial construction loan and a construction business loan. A Commercial Construction Loan is a loan used to finance vertical construction or renovation projects of a commercial building. They are mainly offered to growing small businesses in need of expanding their operations. A Construction Business Loan is a loan that is used by a construction company to finance their operations: pay for employees, office expenses, or even purchase land or equipment for their business.
In this article, we will focus on Commercial Construction Loans.
We must also emphasize that both types of loans are loans and not lines of credit. Business lines of credits serve a different purpose from traditional loans in that you have access to capital without having to resubmit an application, and you only pay interest in what you use at the end of the period due; their requirements are more stringent than traditional loans, so having a track record of a profitable business is a must.
What are the requirements for a commercial construction loan?
- Personal and Business Credit Scores
- Business and Personal Tax Returns
- Down Payment
- Typically, over 5+ years in business
- Business Plan and Financial Reports
- Demonstrate acceptable debt ratios
- Detailed construction drawings of your intended project
- Net worth of your business
- Project Costs from a reputable contractor
Most Common Types of commercial construction loans
SBA CDC/504 Loan Program
One of the most sought-after loan programs because of its low interest fixed rates, and long-term financing for projects up to 5 million. Repayment terms are 10 and 20 years with interest rates pegged above the current 5-year and 10-year U.S. Treasury issues.
SBA 7(a) Loan Program
The SBA 7 (a) Loan Program is the most common type of loan from the SBA. It is as well for projects up to $5 million. The key to qualifying for this loan is based on what the business does for profit, its credit history, and where are its operations. Interest rates are based on the prime rate plus a percentage rate between 2.25% – 4.75% depending on if its maturity rate is less than 7 years or over 7 years.
Traditional Commercial Loans from banks vary in that every bank has its own rates, repayment terms, and down payment requirements. A typical scenario is a 10% down payment, 25-year repayment periods, and are offered with variable and fixed rates. Qualifying for a traditional loan is more cumbersome than SBA or private lender loans but does offer attractive rates for any well-established business.
Private investors or companies
Private investor loans, also known as “hard money loans,” are loans made to any business in need of working capital, land acquisitions, construction projects, or equipment. Collateral is required, and they typically pegged it to business assets of the business applying for the loan. Rates tend to be higher than most loans, but qualifying for them, many times, is a faster than their alternatives and have less upfront costs.
Fees vary from lender to lender, but many share a few listed below:
- Document Fees
- Processing Fees
- Project Review Fees
- Guarantee Fees
Borrowers should expect to pay interest rates between 4% – 12% for conventional loans and as high as 20%-30% for private loans.
The nature of any construction project is considered a high-risk endeavor from the standpoint of lenders. Because of this, most, if not all, lenders seldom finance 100% of construction projects. They require borrowers a down payment of 10% up to, as high as 30% of the project to have borrowers take some risks that construction projects entail.
Commercial construction loan process
Contact a lender
The first step to acquiring a commercial construction loan for your business is to do your research the same way lenders will do for your business. Although lenders live in a competitive market, where they differ is in how long they take and how scrutinous they are. So, a thorough research of which lender will best fit with your company goals and how reliable they are, will impact your business goals.
A good place to start is by going to a local commercial bank in your city. Local banks are best for commercial construction loans because they can send their agents to where you want you build your project. They will inspect the site to make sure that every money lent is spent on the project and not elsewhere. This is important to have when making a draw once a milestone is reached.
Loan Review & Underwriting
During this step of construction loan review, the loan company performs due diligence to ensure that everything is in accord with the risk that will need to be undertaken by all parties. Here, the lender will look at all the information submitted by you, the potential borrower, and perform their own analysis. This is a process where every lender uses their own criteria to decide if they will fund your project or not. But although the criteria used might vary from lender to lender, here are basic points most lenders check.
1) the Loan-to-Cost Ratio
(2) the Loan-to-Value Ratio
(3) the Debt Service Coverage Ratio
(4) the Profit Ratio
(5) the Net-Worth-to-Loan-Size Ratio
Loan Agreement & Closing
Once a loan decision is made in favor of the borrower, the decision to close the loan belongs to the borrower. Agreeing to the loan terms and repayment period is what will grant you access to the funds.