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Commercial Construction Financing Explained 

Whether you’re ready to expand your business or you are starting to build your business from the ground up, a commercial construction loan can make your dream a reality. Sometimes referred to as a construction mortgage, this specialized financing is designed for business owners and their financial needs.

What are commercial construction loans?

When you reach the point when real estate development is your next step toward growing your business, it may be time to seek support to scale to that possibility. As construction and renovation are costs often outside companies’ budgets, a loan for commercial construction can offer the flexibility necessary to make your vision possible.

How commercial construction loans work

Unlike most loans, which are structured so the borrower receives the full loan amount up front, commercial construction loans are delivered in pieces as the project hits defined milestones. 

To structure these payments, clients work with their lender to outline what’s called a draw schedule. Draw schedules are payment plans that break down the timeline and parameters for each disbursement of the loan. 

As you move through your construction timeline, your lender will most likely require an inspector to confirm each portion of your progress before releasing the next draw. The draw schedule protects your lender and allows you to pay interest only on the portion you have received. This way, you will not start accruing interest on the full loan amount from the beginning.

When it’s time for your loan to be paid in full, and once construction is completed, your property can now serve as collateral to refinance into a commercial mortgage. This way, you’re able to make monthly payments using the mortgage, and you’re not stuck having to cover a lump sum.

Types of commercial construction loans

1. Bank loans

Outside of the SBA, banks can offer builders or business owners a short-term line of credit to cover the costs throughout the construction phase. Once construction is complete, you can refinance your short-term loan into a permanent or long-term loan to finance future projects and additional business expenses.

Commercial loans through a bank can be used to:

  • Build new facilities
  • Upgrade and modernize facilities
  • Expand current buildings

Though interest rates vary across different banks, you can find competitive rates specific to your financing needs. Generally, repayment terms of 25 years are standard, with fixed and variable rate options available.

2. The SBA CDC/504 Loan Program

The CDC/504 Loan Program is offered through Certified Development Companies (CDCs), community-based partners of The Small Business Administration (SBA). They offer long term loans with a fixed rate to for-profit companies with a tangible net worth of less than $15 million and an average net income of less than $5 million, after federal income taxes.

504 loans cannot be used for working capital, but they can be used for:

  • Existing buildings or land 
  • New facilities 
  • Long-term machinery and equipment

With this loan program, interest rates are based on the market rates of United States Treasury issues, and repayment terms can follow both 10- and 20-year plans.

3. The SBA 7(a) Loan Program

For smaller for-profit businesses, SBA provides fixed and variable rate loans of up to $5 million through their 7(a) Loan Program. Businesses receiving this loan must demonstrate the need for funds in order to see through a sound business purpose.

7(a) loans are ideal for real estate-related purchases and can include:

  • Short- and long-term working capital 
  • Refinance current business debt 
  • Purchase furniture, fixtures, and supplies 

Through this loan program, interest rates vary, and repayment terms can be up to 25 years. For fixed-rate loans, you can have a constant repayment schedule set at the beginning of the project. For variable rate loans, your payments may change as interest rates change. 

Preparing your initial loan application

When setting out to apply for your commercial construction loan, identifying the information needed is important to expedite your loan request. Based on the type of loan you are applying for, your lender will require specific details of your business and project. 

Generally, your lender will ask for the following:

  • A detailed business plan
  • A timetable of the project
  • A realistic budget for the project
  • Construction details and project plan

To have your application approved, you will need to provide documentation through the underwriting process. This internal process conducted by your lender will verify whether or not you meet the requirements for your requested loan and will assess the accuracy of the information you have provided.

During this process, your lender can request:

  • Personal and business tax returns
  • Bank statements and balance sheets
  • Debt schedules showing current debt obligations

Once you are approved, you and your lender will review your interest rates and terms and outline your draw schedule.

Find long term support 

By outlining your goals and preparing information for the underwriting process, you can be best equipped to apply for your commercial construction loan. As commercial construction loans can finance a range of expenses, and their specific coverage can vary, it is important to find a lender able to provide the support and guidance you need to make the right choices for your business.

If you’re a business owner looking for a trusted partner in navigating the next steps toward your business growth, give us a call at Crown Bank. Crown Bank’s seasoned team of bankers are prepared to guide you through the entire process, help you gather documentation you need to get started, and continue supporting your business long term.

To take control of the future of your company, contact Crown Bank to see what we can make possible for your business.