Commercial Construction Loans
Grow your commercial construction business with commercial construction loans. Or explore an alternative funding option offering flexible payment terms to commercial contractors like Billd.
Commercial Construction Loans
Introduction to Funding for Commercial Construction
Commercial construction loans are an excellent tool for businesses looking to expand their current location or build a brand new space. Whether you’re running a restaurant, business office, or retail facility, a commercial construction loan can provide you with the financial liquidity you need to grow your business. There are various construction loans available for businesses that need to establish or expand their commercial space. Unlike small business loans, personal loans, or home mortgages, commercial construction loans are specifically designed for your business real estate investments, such as land, building renovations, or new construction.
To help you find the right financing option for your commercial construction needs, we have compiled the following guide. Here, you will learn about the different types of construction loans, their benefits, and how to obtain them. We will also discuss alternative financing options, like Billd, a payment solution specially designed for commercial construction contractors and businesses that allows you to get 120-day flexible terms in construction materials and same-day purchases to help you grow your commercial construction business.
What is a Construction Loan?
Construction loans are typically short-term loans provided by a bank or financial institution to finance a building project. This can be a new structure or an addition to an additional structure for residential or commercial properties. Construction business loans are also available to contractors who need to obtain supplies for an upcoming residential or commercial project.
Home Construction Loans
Home construction loans are geared toward homeowners who wish to build a new home from the ground up or expand their residential space. These loans tend to be short-term, for one year or less. For many home construction loans, the financial institution requires that the construction be completed and a certificate of occupancy issued within the term of the loan, in addition to completing the repayment.
Commercial Construction Loans
Commercial construction loans are specifically designed to assist businesses and commercial properties that establish new buildings, expand existing commercial space, or renovate their current space. Because construction projects tend to be very expensive, many companies cannot pay for the project immediately. Commercial construction financing offers businesses the ability to front the costs for the location, construction materials, and contractors necessary to get the project started while making affordable payments over time. Unlike home construction loans, commercial construction loans are often disbursed on a schedule, with set amounts released at specific points throughout the construction project. This allows borrowers to pay interest on only the current amount owed instead of the full project cost.
Contractor Construction Loans
Business loans for contractors operate as commercial construction loans and provide finance for contractors who need extra cash flow for current or upcoming construction projects. These general contractor loans are allocated on an as-needed basis, with interest charged only on the amount borrowed at the time, not the total approved loan value.
Different Types of Construction Loans
Whether you are looking into loans for contractors or commercial construction financing for your business expansion, there are a wide variety of commercial construction loans to choose from. Depending on the lender and intended use, each construction loan type is subject to different terms and restrictions.
Small Business Administration (SBA) 7(a) Loans
The U.S. Small Business Administration’s most common business loan is the SBA 7(a) loan. This long-term small business financing option offers project-based funding amounts up to $5 million, or $350,000 for small projects, depending on the type of investment. 7(a) loans are highly versatile and can be used for various business investments and real estate funding. The amounts, term lengths, and interest rates are negotiated between the lender and borrower but must usually be SBA approved. The SBA will guarantee the loan up to a particular amount, depending on the amount financed.
Small Business Administration (SBA) 504 Loans
The U.S. Small Business Administration (SBA) offers long-term 504 small business loans with fixed interest to for-profit organizations making less than $5 million per year, provided the total net worth of the business is less than $15 million. These construction loans provide business owners with the necessary funding to procure land and buildings, renovate existing facilities, or build new ones. The SBA offers these loans through participating financial institutions, called Certified Development Companies (CDCs). CDCs are certified community-based organizations that assist with local economic development in their communities. They are certified and regulated by the SBA and provide a portion of the loan funding. Typically, the borrower will be expected to pay 10% of the project cost upfront, and the SBA and CDC will divide the remaining financing.
Traditional Bank Loans
When you acquire commercial construction loans from a traditional banking institution, you can expect a broader range of financing amounts, down payments, interest rates, term lengths, and eligibility requirements. Each financial institution has different down payment requirements, depending on your credit score, business profitability, and loan amount, among other factors. You should plan to pay between 10% and 30% of your loan as a down payment. Interest rates may be fixed or adjustable, and you may be able to arrange for interest-only payments during your project’s construction period. To see if a traditional bank loan is right for you, check the bank’s site for a commercial construction loan calculator. This should help you get an idea of the payments you can expect to make with different repayment terms and interest rates.
Mezzanine financing features loans that blend standard and equity financing to provide the lender with interest in the company if the borrower defaults. It is ideal for already-established companies that are looking to expand their business. In the event of default, the lender can convert the secured shares of stock into an equity interest in the company, giving them partial ownership and potentially reducing the original owner’s control over the business. Mezzanine financing can be riskier, as it requires a higher rate of return that is often greater than 20%. This type of commercial construction funding is usually offered by venture capital companies and alternative lending institutions.
Hard Money Loans
A last resort option for businesses, hard money loans can help businesses unable to obtain construction financing through the SBA or a traditional financial institution and have not sufficiently established the business to procure mezzanine financing. Similar to mezzanine financing, hard money loans require collateral to secure the loan. However, rather than securing the loan with stock shares, the lender will secure the loan using real property, such as real estate owned by the borrowing business. In the event of default, the lender would take possession of the property. These loans tend to be more expensive, with higher interest rates and fees. Therefore, it is crucial to explore all of your commercial construction loan financing options before opting for a hard money loan.
How Does a Construction Loan Work?
While there are various construction loans available on the market, the majority are specifically geared toward helping business owners obtain construction funding quickly, with short payment terms and progressive interest.
Construction loans offer a variety of benefits over personal and small business loans. Unlike other types of loans, the principal is not distributed the borrowing business in a lump sum. Instead, your company receives payments in regular installments based on your project’s progress and expected timeline. You will be expected to pay interest on the amount you have borrowed but will often be able to make interest-only payments while construction is ongoing. Not only does this make repayment more manageable, you only pay interest on the amount of funding you use.
Reasons Why Getting One
Construction loans are an excellent way to obtain timely funding to facilitate your business growth. They can be used for a wide variety of real estate and property investments, including:
- Construction Equipment and Materials: Your commercial construction loan can be used to obtain the materials and equipment necessary to build new buildings and facilities.
- Facility Renovation and Expansion: You can use your construction financing to renovate or expand your existing facilities.
- Recruit and Train Construction Personnel: If you need to hire employees specifically for your construction project, you can use your commercial construction funding for hiring, training, and educating those employees.
- Repair and Remediate Property Damage: If your business property is severely damaged in a natural disaster or other unforeseen circumstance, you can obtain commercial construction financing to repair the damage.
- Obtain and Develop Land: Your commercial construction loan can be used to purchase land and develop it for your business.
How Can you Get a Commercial Construction Loan?
Commercial construction loans can be more challenging to obtain than other loan types. Since new businesses rarely have collateral to secure the loan, and construction costs can be very high, lenders generally consider commercial construction loans to be a higher risk. This means that you will need to meet more stringent requirements to obtain a construction loan for your business. Below are some factors that your lender will consider when you apply for a commercial construction loan:
To obtain commercial construction financing, a traditional lender will typically require a down payment of at least 20% of the total expected project cost. This can be mitigated if you have existing business assets that can be used as collateral against the loan. For example, if you own the land on which you intend to build, you can use that land’s value toward your down payment. Overall, your down payment will vary depending on the amount you borrow and how you intend to use the loan.
Business and Personal Credit Scores
Your lending institution will obtain a copy of your credit history as the business owner, as well as the business credit history if it has already been established. Keep this in mind before you apply, and do the work to bring your FICO score up before you submit your application for a construction loan. Generally, business owners with scores below 650 are considered to be riskier and may be denied. Be sure to check your payment history and take care of any negative reports or missed payments that can make you appear less reliable.
Personal and Business Financial Documentation
When you apply for a commercial construction loan, your bank will ask for detailed financial statements, especially about any loans or liens on the property you intend to build out. Expect to provide both personal and business financial statements, including Profit and Loss (P&L) statements, bank statements, tax returns, and asset valuations.
Contractor History and Reputation
For commercial construction funding, lenders want to know that they are financing a viable project. This includes using a contractor or builder with a solid reputation with prior customers, vendors, subcontractors, and employees. Any information found on online review sites can be taken into account by the lender when considering whether to approve your loan. If you are the builder, this means safeguarding your reputation so that you can take out loans for construction materials and labor for your project. If you are the business owner and plan to hire a contractor, be sure to consider online reviews and contact the National Association of Home Builders to find a qualified builder with a good reputation. Improve your chances of getting financing by submitting evidence of a positive reputation with your application.
Detailed Construction Estimates and Appraisal
Remember that you are asking the lender to take a risk on your project when you apply for a construction loan. With more information about your project, the financial institution will be better able to determine your business’s value and risk. To this end, be sure to provide detailed building plans, contract specifications, and clear cost estimates with your applications. Besides, take the time to get a good professional appraisal of your project so that you can provide your lender with an estimate of your project’s future value. A good assessment can go a long way toward getting you the loan approval you need to move forward with your project.
Billd: Alternative Funding For Construction Contractors
When you’re operating a construction business, the costs associated with taking on new projects and expanding your business can be prohibitive. When taking on new clients, most contractors must be able to purchase materials at the start of the project while still offering competitive payment terms. This can create a problem with cash flow, forcing contractors to decline promising contracts.
Billd offers an alternative payment solution that provides contractors with funding for commercial construction materials with a short 120-day payback term. With this funding, your construction business can take on more clients without balancing customer payments with supply orders. Suppliers benefit from partnering with Billd, as well. Rather than set up payment plans over time, construction materials suppliers are paid upfront by Billd. The construction company pays for those materials on a flexible payment plan.
Unlike construction loans through banks and lenders, Billd is a construction company that construction industry experts run. They understand that contractors play an essential role in the economy and are committed to providing them with the financial support and stability they need to take on new projects. At Billd, they understand that the construction industry is anything but predictable, which is why they offer flexible payment terms rather than penalizing contractors for late payments.
Conclusion: Practical Commercial Construction Financing for Contractors
Whether you are a growing business, a construction contractor, or a supplier, you can benefit from the alternative funding options offered by Billd. Instead of applying for commercial construction loans for your project supplies, you can work directly with Billd to arrange flexible payment terms that fit your schedule and budget.
Billd is used to working with contractors at all levels, with revenues from $500k to $50 million per year. Their goal is to ensure that contractors can obtain supplies for multiple projects when they need them, while suppliers can rest assured that they will be paid right away.
Whether you are a contractor looking to finance materials for your project or a supplier looking to grow your sales with less risk, working with Billd is straightforward. If you want to learn more, read more about how Billd can help you fill out this online form for a dedicated representative to contact you.