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According to Associated General Contractors, the construction sector plays a significant role in the U.S. economy, making a substantial contribution to its growth. With over 753,000 employers and over 7.8 million employees, this industry generates nearly $1.8 trillion of structures annually.
Additionally, construction is a major consumer of manufacturing, mining, and various other services, making it one of the largest customers in these sectors. Construction business loans are designed for businesses in the construction industry and can provide funding for equipment purchases, payroll, and other business expenses.
To obtain a construction business loan, assess your business’s financial health, determine your loan needs, gather necessary documentation, apply for the loan, and wait for approval. The process can be lengthy and challenging, but it can be done successfully with the right preparation and research. Read on to learn more about commercial construction loans.
What Are Commercial Construction Loans?
If you are a business owner or investor planning to construct or renovate a commercial property, you may need to consider taking out a commercial construction loan. This type of loan provides financing specifically tailored for commercial construction projects and can be a valuable tool for helping you bring your project to life.
The funds from a commercial construction loan can cover a variety of expenses related to your project, including the cost of materials, labor, and permits. These loans typically have various terms, interest rates, and repayment schedules, depending on the lender and the borrower’s circumstances.
Business Insider reports that a construction loan’s interest rate is usually higher than a regular mortgage. Lenders perceive construction loans as high-risk since there is no established property to serve as collateral, which is why they demand higher interest rates.
How Do Commercial Construction Loans Work?
According to Investopedia, commercial loans are typically provided to different types of businesses to assist with funding needs, whether for short-term operational expenses or the purchase of equipment necessary for production. These loans may also be used to cover more basic operational needs, such as payroll or purchasing supplies.
Collateral, which may include property or equipment, is often required and can be seized by the lender if the borrower defaults on the loan or goes bankrupt. In some cases, future accounts receivable may be used as collateral.
Types of Construction Loans
Understanding the different types of commercial loans can help businesses make informed financial decisions and secure funding for their ventures. As per The Balance, there are several types of commercial loans. These include the following:
- Land Development Loan: Used to prepare raw or undeveloped land for commercial or residential use, including installing infrastructure.
- Interim Construction Loan: A short-term loan covering labor and material costs for commercial development projects, usually valid for 18 to 36 months.
- Mini Perm Loan: A short-term loan like a bridge loan that pays off outstanding loans for projects that will produce income, replaced by long-term financing after 2-3 years.
- A&D Loan: For purchasing raw land or underutilized/run-down property that needs improvements, covering the purchase and necessary improvements.
- Takeout Loan: Provides permanent financing for commercial projects with temporary loans, sometimes required before a short-term loan can be granted.
Why Get a Commercial Construction Loan
A commercial construction loan can offer the necessary funds to upgrade and improve an existing commercial property that needs renovations. Renovating your property can increase its value, attract new tenants or customers, and promote business growth.
If your business is expanding and you require additional space to cater to the growth, a commercial construction loan can provide the necessary funds to expand your existing commercial property or construct a new one. This can help you fulfill the needs of your clients or customers and boost your revenue.
For investors, a business construction loan can be an opportunity to invest in commercial construction loan properties and earn income through rental or resale. These loans can provide a way to enter the thriving commercial construction loan market and potentially achieve a high return on investment.
How To Get a Commercial Construction Loan
Getting a commercial construction loan is different from a home loan because it involves buying a property for business purposes and paying the loan with business revenue. Lenders have three main requirements to ensure that your business can cover the loan payments:
- Security: Investopedia notes that the majority of lending institutions mandate a minimum down payment of 20% for construction loans, while certain lenders may insist on a higher percentage, reaching up to 30-40%+. Property insurance is also essential, and the lender will check the property’s title for outstanding liens or claims.
- Income: Forbes states that a lower debt-to-income (DTI) ratio indicates a greater amount of available cash that can be allocated toward monthly loan payments. Lenders generally require a maximum ratio of 40-45% when approving construction loans, although this could be lower depending on the details of the individual project.
- Credit: Lenders check your credit history and require a personal guarantee. CNBC explains that the minimum credit score required is typically between 660 and 720. Lenders assess your business’s revenue source and how long you’ve been in business.
To make an informed decision, Market Business News recommends that you thoroughly research a selection of potential lenders. Further, you should actively negotiate the loan terms, which include crucial aspects such as the interest rate, loan amount, and repayment terms.
Doing so can maximize your potential for obtaining a loan that aligns with your financial goals and protects your long-term financial well-being. Remember, careful consideration and effective negotiation can significantly impact your loan’s affordability and overall cost.
Grow Your Business With a Commercial Construction Loan
The importance of commercial construction loans lies in providing businesses with the financial resources to expand and grow their operations. With a commercial construction loan, businesses can acquire the funds they need to construct or renovate a commercial property, which can lead to increased revenue, improved business operations, and long-term growth.
If you’re a business owner looking to expand your operations, consider securing a commercial construction loan to acquire the funds needed for your project. Contact us today to learn more about business construction loan requirements and the application process.