If you seek ways to finance a commercial construction project, a commercial construction loan is your answer. It covers the costs associated with the renovation or construction of a commercial structure, paying for materials, labor, and land purchase and development.
Most lenders for these commercial construction loans rarely provide the full amount upfront. Instead, they typically use a layered setup that allows you to borrow a certain amount on a schedule. As such, you can draw the funds upon finishing different milestones specified during in agreement. For instance, you can get more funds after laying the foundation, putting up the frame, and so on until you complete the building.
In addition, the lender requires you to pay interest on the received portion of the loan proceeds. If your project’s total cost is $600,000, but the amount released by your lender is only $200,000, you will pay interest on $200,000. Notably, most companies offering commercial construction loans structure the payment so that you only the interest until they fully disburse the loan. After this, you can pay off the principal in a lump sum after completing your construction endeavor.
You can find various loan sources that match your requirements and give you the funding to get your project going. Nevertheless, before looking at the options available to finance your venture, it is essential to begin by identifying the kinds of loans available.
Types of Loans
In general, you can find four main types of loans available to finance your commercial construction venture. They are:
- Bank loans
- Mezzanine loans
- SBA CDC/504 loan program
- SBA 7(a) loan program
Where to Get Commercial Construction Loans
After looking at the types of loans available to finance your commercial construction project, you may wonder where you can get a lender. Depending on your preferred loan type and project needs, you can find some reliable loaning sources, including:
1. Commercial Banks
A major commercial bank provides an excellent starting point when searching for a source to finance your project. Most bank loans need you to give a minimum down payment of 10 percent, serving to remove some risks off the lender. This payment also works to prove that your business has sufficient financial value to manage a sizeable project. In addition, approaching major banks provides convenient access to sizeable loans suitable for large-scale projects, making it an ideal option when handling a big construction project. With most commercial banks providing variable or fixed interest rates and term lengths reaching up to 25 years, you can confidently begin your project and pay back the borrowed amount more comfortably.
2. Mutual Savings Banks
This bank type is member-controlled, and the participants invest their funds into a common fund, which, in turn, goes into bonds, securities, stocks, and mortgages. These banks invest in high-upside, low-risk ventures, providing lower interest rates on loans. As such, they are a great option if you have a financially sound business that enables the banks to be confident that your construction project will yield a profitable return.
3. Real Estate Investment Trusts
Another quality place to borrow funds for your construction project is Real Estate Investment Trusts (REITs). These companies operate and finance income-generating ventures, making it a quality choice when your project has the potential to produce considerable revenue. They specialize in investing in a particular area, including self-storage facilities, cell towers, and hotels. Therefore, you can identify a REIT that specializes in your area of interest and present a rock-solid project plan to get the lender’s confidence in your construction’s ability to turn a profit.
4. Mortgage Banking Companies
You can get financing for your project using a large mortgage banking company. This bank type differs from a traditional commercial bank by specializing in mortgage loan origin and servicing. You can utilize this source by getting a mortgage loan in the same way you would for a traditional home purchase. The bank requires you to certify that the construction will occur and specifying the project’s scope and contractors. After this, the bank disburses the loan to the contractor each time your commercial construction project completes certain pre-determined milestones. When you complete your building, you take over the mortgage cost and pay it off. Generally, using mortgage banking companies is ideal when your project involves homes and residential areas.
5. Private Money Lenders
Private money lenders present short-term options for your commercial construction project. They have several advantages, such as offering faster funding and minimal upfront costs than the other options. Nonetheless, they incorporate higher fees and interest rates that prove to be more expensive in the end.
6. Life Insurance Companies
Life insurance companies offer some of the best instruments for obtaining major commercial loans. They provide construction loans in four primary areas: office, retail, apartment, and commercial properties. Aside from these, these companies can finance other considerable projects according to your company’s assets, such as restaurants and hotels. Hence, they are a suitable loan source when you are dealing with a large-scale commercial construction project.
You can get a minimum of $5 million construction loan amount from most life insurance companies, with a maximum of 75% of a business’s total assets also available. This backing by an investor’s assets enables you to find favorable rates and, in most cases, free of taxes, closing costs, and extra fees. However, they have prepayment penalties, with most term lengths being 30 years. As a result, you will pay the interest for a long time and eventually offset the lower rates obtained upfront.
Application Requirements for a Loan for a Commercial Construction Project?
Upon finding a fitting lender, you can begin your application for the loan. During this process, you will require to provide various proofs of legitimacy and meet the lender’s requirements to back your loan request. They include:
- A detailed business plan with specs and designs
- Personal and business financial documents
- A strong credit score
- Down payment
- Good reputation
The lender typically works with appraisers to analyze your specifications and review the impending construction project. They compare it to similar projects during the analysis to determine what your construction’s worth in the future. As such, getting a good appraisal is critical to the lender accepting your loan request. In all, since loans for commercial construction projects are generally high risk, lenders usually take a minimum of several weeks to go through your information. They may also need additional documentation or have questions, and thus, it is advisable to avail yourself readily to accelerate the process.
Looking at the different ways you can use to finance your commercial construction project and the requirements for a loan application, you can conveniently find the best-fitting option to help you realize your dreams. Beyer Mechanical in Corpus Christi, San Antonio, and Austin, TX, presents a perfect means of putting the final additions on your venture, offering heating and air conditioning services for commercial clients, including small businesses, multi-family properties, commercial offices, and grocery stores.
Dating back to 1989, this company has a team of skilled technicians that deliver legendary HVAC services with safety and exceptional result, leaving you with lasting comfort and satisfaction. Besides these, we also provide additional commercial services such as system installation, remodels, construction, design, project starts, and in-house engineering & design builds. Get in touch with Beyer Mechanical today and get professional assistance from our trusted team in San Antonio.