How to Finance a Commercial Construction Project
With a variety of options available for financing commercial construction, it may get a little confusing to keep everything straight.
While there are several options to choose from, the financing for commercial property can sometimes be tough to receive if there is no current cash flow that proves the loan can be paid back.
In this blog, we take a look at the different loans available for your next commercial steel construction project and what requirements you need to meet to qualify for approval.
The topics below explain what you can expect to see when searching for funding to finance your commercial construction project.
What Are Commercial Construction Loans?
Commercial construction loans are typically no longer than 24 months, which is the timeframe that you need to be able to finish construction on your building.
Your specific circumstances will determine the loan amount you are eligible to receive, but typically the lending amount is between 75% and 100% of construction costs.
Construction loans can be one-time-closing or two-time-closing loans. One-time-closing loans tie in both construction and permanent stages into one loan. Two-time-closing loans have two separate deals.
How Do I Qualify for a Commercial Construction Loan?
Since construction loans are considered high-risk, due to the fact many business owners do not yet have existing cash flow, there are strict requirements one must meet.
Here are the requirements that lenders want you to meet:
- Strong credit history: When you apply for any type of loan, you must prove your ability to repay loans (which is through your FICO credit score and credit history). You will most likely need to show your business's credit history if you are applying as a small business.
- Detailed plans if approved for loans: You will need to provide detailed building plans, cost estimates, and construction contracts to qualify for a loan.
- Down payment: For you to receive a construction loan, you will have to provide a down payment of at least 20% of the total cost of the project. The exact amount of the down payment will vary depending on your specific situation, like the total cost of your construction project, where it will be, and many other factors.
- Usually, loan lenders ask for a higher down payment to ensure that you will see the project through to the end.
- Financial documents: The lender will look into your current debt history (as well as your past), and any other loans you have on record. You may need to provide tax returns, proof of assets, and financial statements.
- Appraisal: Construction loan lenders work with appraisers to review your impending project. When you apply for a loan, the appraisers will analyze the specifications of your new construction project and compare it to similar ones. After the analysis, they will conclude what the value of the construction project could be in the future. Receiving a good appraisal is crucial to being accepted for a loan.
- Good reputation: The lender will research the building company that you are working with to see if they have a good reputation. Any type of public information such as online client reviews, vendor reviews, and previous project history is fair game.
- The builder that you choose to work with should have no hesitations to provide proof of their excellent reputation.
Types of Commercial Construction Loans
Now that you know how the approval process works and what information you will need to provide in order to qualify for a commercial construction loan let's take a look at the most common types of construction loans your can available apply for.
Land Development Loan
A land development loan can be obtained with undeveloped (or raw) land that has to be made construction-ready.
In order to make the land into a construction-ready site, it may require water or power lines, as well as the installation of a sewer line.
Acquisition and Development Loan
If the raw land is ready to be developed or already is developed but requires improvements, an acquisition and development loan is something you qualify for.
An acquisition and development loan covers the costs of purchasing the land as well as any improvements that the infrastructure needs prior to development being finished.
Mini Perm Loan
A mini perm loan is a temporary loan obtained through commercial banks. It is used for settling substantial construction loans on projects that will produce an outcome once completed.
Once three (to five) years of generating income pass, the mini perm loan is replaced with long-term financing.
This type of loan provides financing on projects that already have a short-term construction loan. A lot of construction loan lenders require that you secure a takeout loan before the short-term loan is granted.
Interim Construction Loan
This loan helps to pay for construction materials and labor. Interim loans are valid up to 36 months and are settled when a long-term mortgage is in place.
Crowdfunding helps to unite small investors to pool funds for specific projects. Instead of going to a bank to get a loan for your commercial construction project, you can sign up with a crowdfunding platform (like GoFundMe and Kickstarter) in order to raise the necessary funds for your project.
This type of funding is becoming mainstream, and more people are raising money for their small projects this way.
If you want to build an eco-friendly commercial steel building in your neighborhood, crowdfunding may be the way to get your necessary funding!
Bring Your Funded Construction Project To Life With CDMG!
Now that you know how to qualify for loans and understand which loans are available to you for funding your next commercial steel building construction project, the next step is to get in contact with a top metal building company to bring your custom-designed dreams to life!
Click the button below to start talking to an experienced CDMG sales representative today!