What Are the Best Options for Commercial Construction Funding?
It might be fun to begin a "new commercial construction project." Many times, getting the proper "commercial construction funding" is the most essential thing that needs to be done before the building can start.
A good number of builders and investors in real estate don't understand how to make the most of the different "commercial construction loan options." It is essential to understand the details of loan terms, interest rates, and the various types of loans available.
For over 30 years, Commercial Lending USA has helped individuals and businesses nationwide secure the construction loans they need. To achieve this, they maintain contact with more than 200 private lenders and investors.
Today, we're going to talk in-depth about the "best commercial construction funding" choices and how these loans work. You will know what to do when you start making your next project, whether it's an apartment building, a hotel, or a self-storage unit.
Understanding Commercial Construction Funding
What is Commercial Construction Funding?
There are specific types of loans that can be used to build or renovate business and residential investment properties. This is what "commercial construction funding" means. These loans differ from regular mortgages because they are paid out in parts (draws) based on the progress of the commercial project rather than all at once upon completion of the house. The lender reviews the borrower's funds, the commercial project plan, and the budget to ensure the project can proceed.
Why is Proper Funding Crucial for Your Construction Project?
Obtaining the right amount of money for a construction project is essential. It is very crucial to avoid risk because having safe money helps ensure that the building job doesn't get behind schedule or cost more than planned. It also promises that the project will be completed by adhering to a regular schedule and ensuring that funds continue to flow, which allows work to proceed. The loan terms and funding plan that real estate owners choose can significantly impact their economic returns. This helps them maximize the value of their assets.
Common Types of Commercial Construction Loans
Traditional Commercial Construction Loans
Most of the time, banks and credit unions offer standard loans to help business owners expand their operations. The framework of these loans is critical. The Loan-to-Cost (LTC) ratio, for instance, typically ranges from 60% to 80%. This means that the lender will pay for some of the total project cost. Most of the time, interest is only added to the money borrowed to pay for things, not to the entire loan amount from the beginning. Most loans have short terms of 12 to 24 months, so it's essential to have a plan for switching from construction financing to stable financing once the building is finished. These loans are beneficial because the rates are low, and the repayment terms are stable. Even so, they generally have stricter underwriting rules and take longer to get approved.
Hard Money Loans for Commercial Construction
Based on your assets, private lenders will give you short-term loans. We call these "hard money loans." They are great for cases where closings need to happen quickly, for individuals with limited credit, or specific types of commercial projects, such as fix-and-flip homes. Hard money loans have higher interest rates than standard loans, a lower Loan-to-Cost (LTC) ratio, and a faster loan approval process because they focus more on the value of the collateral.
Bridge Loans
These are short-term loans that are meant to "bridge" the time between when you need money quickly and when you can either get longer-term funds or sell your current home. They can be used in construction to purchase land before a commercial construction loan is fully secured, or they can be utilized for short-term financing during specific stages of a commercial project. Before obtaining longer-term loans, such as business real estate loans or commercial mortgages, they are often the first step toward securing these types of loans.
SBA Loans for Commercial Construction
SBA loans, particularly the 7(a) and 504 loan programs, are a viable option for small businesses seeking to finance commercial construction projects. Small business owners can obtain them more easily because they require less money upfront, have longer loan terms, and offer low interest rates. You can get these loans for any size business, and they can be used to support a wide range of commercial properties, particularly those that the business owner lives in and owns. It is part of the process to work with approved lenders who handle the SBA guarantee.
USDA B&I Loans
Businesses in rural areas can get loans from the USDA for Business & Industry (B&I). For commercial construction projects, they can be utilized. One significant advantage of these loans is that the terms are favorable, and the government backs them, which makes them safer for lenders. They are targeting both small and large businesses that support rural areas' growth and job creation.
FHA Commercial Property Investment Loans
For example, the Federal Housing Administration (FHA) helps finance specific business properties, primarily those that are part of community-oriented developments, such as senior and assisted living facilities. Long loan terms and low fixed interest rates are two key benefits of FHA business property investment loans, making them a favorable choice for developers operating in these areas.
Other Specialized Loan Options
There are a few different types of loans that aren't as popular and are made explicitly for commercial construction.
Debt Service Ratio (DSR) loans are primarily used for rental investment properties, and the Debt Service Coverage Ratio (DSCR) is the primary factor used to determine whether the loan is approved.
No-doc or Lite-doc loans are ideal for business properties where speed and minimal paperwork are crucial. However, because there is less paperwork, interest rates are usually higher.
Stated-income loans are an alternative for commercial construction projects where traditional income verification is challenging. They allow borrowers to disclose their income without requiring extensive documentation.
The journey for commercial construction funding begins with the initial loan request and application. To prepare, you'll need a comprehensive business plan, detailed construction project plans, and robust financial statements. A strong application, filled with precise and thorough information, is crucial as it significantly streamlines the loan approval process. As an economic consultancy, our role is to assist you in preparing a comprehensive and compelling loan request, thereby maximizing your chances of success.
The Commercial Construction Loan Process: How Loans Work
Initial Loan Request and Application
The first step in securing funding for business construction is to request and complete a loan application. You'll need a thorough business plan, construction project plans, and strong financial statements to get ready. A strong application with accurate and complete information is crucial, as it significantly accelerates the loan approval process. As an economic consulting firm, it's our project to help you make a strong and full loan request that gives you the best chance of being approved.
Underwriting and Due Diligence
We've been in business for 30 years, allowing us to inspect everything thoroughly. During the screening and due diligence process, several key factors are examined. Some of these include the borrower's creditworthiness, the construction project's general viability, a comprehensive market analysis, a thorough loan-to-cost analysis, and the crucial debt service coverage ratio (DSCR). Lenders carefully consider all the risks associated with the construction project before making a decision.
Loan Approval and Closing
Certain conditions may be met if the screening process goes well. Now is the time to ensure you understand all the lender's terms and conditions. Once everything is agreed upon, official paperwork for the commercial construction funding will be made and signed. This marks the end of the loan.
The Draw Schedule and Fund Disbursement
Phased funding is used for commercial construction loans, which means that funds are released in stages or draws. This method enables lenders to monitor the project at various stages, ensuring that everything is progressing as planned and staying within budget before providing additional funding. Handling draws effectively is crucial to keep the project moving forward; this means communicating clearly and providing accurate reports.
Construction to Permanent Loans
"Construction-to-permanent financing" is the process of transferring from a short-term commercial construction loan to a longer-term commercial mortgage or real estate loan. The adoption of this adjustment will lead to several positive outcomes, including easier cash flow management, extended loan terms, and stable interest rates. Through using this information, you will be able to come up with better ways for your business to make money from the land you own.
Key Considerations When Seeking Commercial Construction Funding
Project Type and Property Specifics
The most important factors to consider when seeking funding are the type of construction project and the specific details of the property. Suppose you want to invest in business properties, such as restaurants, multifamily buildings, fix-and-flip projects, or properties to hold for the long term. In that case, you will need different amounts of money. Because we have worked with a wide range of commercial properties, we understand how to make informed loan choices that best suit your development needs.
Loan Terms and Interest Rates
For any building job, it's essential to understand how loan terms and interest rates work. When deciding between fixed and variable interest rates, think about how each affects your spending. Structures of repayment, such as balloon payments or payback schedules, will also significantly impact how you plan your finances. Also, be aware of any early payment fees that may be included in the loan terms. These can make it harder for you to pay off the loan early without incurring additional costs.
Loan to Cost (LTC) and Loan to Value (LTV)
Loan-to-Value (LTV) and Loan-to-Cost (LTC) are two important ratios that have a direct effect on how much business construction funding you can get. It's essential to understand these measures because they indicate to the lender the level of risk they are taking on and, in turn, the amount of equity you need to put down. The less money you have to put down at the beginning, the higher the LTC or LTV a lender is willing to offer.
Borrower Qualifications and Financial Health
Lenders will carefully assess your ability to repay the loan and your overall financial health. Your credit score and background indicate how responsible you have been with money in the past, which is a significant factor in obtaining a loan. Having experience in development, particularly a history of successful commercial construction projects, can significantly strengthen your loan request. Personal guarantees are sometimes required to provide the lender with extra security, so be prepared for the possibility of having to provide one.
Exit Strategy
A clear plan for exiting the commercial construction funding plan is essential. You need to consider when the construction project will be completed and how you will repay the business construction loan. This could mean selling the finished property or refinancing it into long-term commercial mortgages. This way, solid financing is available after the project is completed, and the business can continue generating revenue.
Why Partner with Commercial Lending USA for Your Commercial Construction Funding Needs
Unmatched Expertise and Network
At Commercial Lending USA, we have been writing loans for 30 years, which has given us extensive knowledge about business real estate loans and financing for construction projects. We offer access to a wide range of loan programs and flexible terms for various types of business properties, thanks to our extensive network of over 200 private owners and lenders. We make it easy for you to secure funding for commercial construction projects as we are both a table funder and a correspondent funder. In other words, you can get capital directly and handle things quickly.
Tailored Financial Solutions
Not only do we offer loans, but we also provide a range of flexible financial options. We can help you obtain bridge loans, SBA loans, hard money loans, and other types of financing that best suit your specific project needs. As a consulting company, we don't just provide loans; we also offer comprehensive financial advice to help you make informed decisions about financing your construction project and ensure its success.
Exclusive and Non-Exclusive Referral Programs
We offer both exclusive and non-exclusive referral programs, allowing both new and experienced traders to benefit from them. When brokers work with us, they can give their clients more choices for business construction funding. We promise to work together openly and efficiently, ensuring a smooth process for everyone.
Diverse Project Experience
We're skilled at what we do because we've worked on numerous business construction projects, from acquiring land to developing large-scale towns. We often work on fix-and-flip, fix-and-hold, fix-and-rent, mixed-use, and hotel business properties, as well as other types of properties. We have worked on numerous construction projects, so we understand what each one requires and the potential problems it may present.
Commitment to Client Success
We are always dedicated to helping our clients succeed. We offer dedicated support from the first inquiry to the completion of the project, guiding you through the whole loan application process and the lifecycle of the construction project. Our primary goal is to establish a long-term relationship with you by fostering clear communication and providing effective funding options that yield positive outcomes.
Conclusion
Getting the proper "commercial construction funding" is a must for any construction project that needs to go well. Before making any choice, it's essential to know a lot about it, from the different kinds of "commercial construction loans" and their terms to how to apply for a loan.
With Commercial Lending USA, we provide real estate investors and developers with the tools, knowledge, and variety of loan options they need to complete their construction projects. We can help you if you need a bridge loan to get cash fast, an SBA loan for your small business, or a "construction to permanent loan" for your industrial properties. We are a correspondent lender and underwriter.
You can still achieve your goals even if you're facing financial difficulties. Contact Commercial Lending USA to schedule a meeting at your earliest convenience. We can help you with your commercial construction projects. Explore our loan options to get started on securing the commercial construction financing you need.
FAQs
What is the typical down payment required for a commercial construction loan?
While the requirements vary significantly based on the lender, loan type, and project specifics, traditional commercial construction loans typically require a down payment (equity contribution) ranging from 20% to 40% of the total project cost. Hard money loans may require a higher equity injection. In contrast, some government-backed loans, such as SBA 504, can offer lower down payments.
How long does it typically take to get a commercial construction loan approved?
The timeline for commercial construction loan approval can vary widely. For traditional bank loans, the process can take anywhere from 30 to 90 days, sometimes longer, due to the extensive underwriting and due diligence required. Hard money loans, also known as bridge loans, are asset-based and sourced from private lenders and can often be approved and funded within a few weeks.
Can I get a commercial construction loan with bad credit?
While challenging, it's not impossible. Traditional lenders, such as banks, will heavily scrutinize your credit score and history. However, hard money lenders or private investors often focus more on the value and viability of the commercial property and project itself rather than solely on the borrower's credit score. Be prepared for higher interest rates and potentially lower loan-to-cost ratios in such cases.
What are the main costs associated with a commercial construction loan beyond the interest rate?
Beyond the interest rate, commercial construction loans typically involve various fees and costs. These can include origination fees (a percentage of the loan amount), appraisal fees, environmental review fees, legal fees for documentation, inspection fees (for draws), title insurance, and sometimes lender's points. It's crucial to get a detailed breakdown of all these costs from your lender.
Can a commercial construction loan be used to purchase land for future development?
While some commercial construction loans might include land acquisition if it's part of an immediate, comprehensive development plan, it's more common to secure a separate land loan or use a bridge loan specifically for the purchase of raw land or a site intended for future development. The construction loan component would then kick in once detailed plans and permits are in place and construction is ready to commence.
Sam Haq, CEO
Commercial Lending USA
www.commerciallendingusa.com
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