The Complete Guide To Commercial Construction Loans

Whether it’s renovations or new construction, the time has come for your business to get a facelift. When it comes to funding your project, your small business might need a commercial loan to give you the resources to start.

Read on to learn more about commercial construction loans, when you should consider applying for one, what you can expect from the application process, and how they differ from commercial real estate loans.

What Is A Commercial Construction Loan?

A commercial construction loan is used to finance the costs associated with the construction or renovation of a commercial building.

Funds from this kind of loan can be used to pay for labor or materials for the renovations of existing properties or for the purchase and development of land for a new commercial property.

Are you looking for a loan to purchase an already existing commercial property? You’ll need to look into a commercial real estate loan.

How Do Commercial Construction Loans Work?

Commercial construction loans have several key differences from traditional loans. We’ll go over those below.

Types Of Commercial Construction Loans

Now that you know more about the commercial construction loan process, it’s time to explore the different types of loans available.

How To Apply For A Commercial Construction Loan

You know about the types of loans available to you, so where do you find a lender? What steps do you need to take to apply? What does the application process include? We’ll go more into depth about applying for a commercial construction loan below.

Step 1: Find A Lender

Your application process is going to look different based on what kind of loan you end up applying for, but the first step is always going to be finding a lender.

• SBA-Approved Intermediary Lenders: These lenders (banks, credit unions, and private lenders) distribute 7(a) loans.
• SBA-approved nonprofit CDCs: Community development corporations provide funding for CDC/504 loans.
• Banks & Credit Unions: These institutions offer every kind of loan we’ve discussed above. Check out our article on applying for a loan through a credit union if you’re unfamiliar with the process.
• Hard Money Lenders: These are private money lenders that provide short-term funding options for commercial construction projects. These loans typically come with higher interest rates and fees.

Once you have a lender, you’ll begin the application process! This is when the lender will begin evaluating your personal and business financials, your credit score, and other factors that will determine whether you get approved for a loan and what your interest rates/terms will be.

Step 2: Improve Your Chances Of Approval

Here are several things potential lenders will consider when you apply:

• Your credit score
• Your business’s credit score
• Your Debt-To-Income ratio (DTI)
• Your Debt Service Coverage Ratio (DSCR)

Your lender will also look at your industry experience and current business financials.

Step 3: Provide Required Documentation

Commercial construction loans are considered high-risk, so you’re going to need to prepare yourself to provide documentation to prove that you’re a smart investment for a lender.

You’ll need to provide the following:

• Detailed Business Plan: This needs to include an overview of what your business does, its financials to date, details about your current operations, and your future projections. In some cases, this plan will need to be altered due to risks spotted by the lender. Make sure you’re flexible!
• Project Details: It probably goes without saying that you’re going to need to provide your lender with detailed plans for your project. This includes, but is not limited to, project specs, designs/blueprints, and an expected project cost which includes estimates for contractors, materials, and other expenses.
• Personal & Business Financial Documents: This is probably another group of materials that you expected to see on this list. Prepare your personal and business tax returns, profit and loss statements, balance sheets, bank statements, income statements, and debt schedules showing current debt obligations.
• Credit Score: While this technically isn’t something you provide, you do need to keep in mind that lenders are going to pull your credit score during the process. Remember that they’re looking for scores in the high 600s. Negative items like bankruptcies, foreclosures, and past defaults on loans may automatically disqualify you from receiving a loan or require an explanation to the lender.

Remember, different lenders may require more or less than this what’s on this list.

Lenders are going to take a minimum of several weeks to go over your information because commercial construction loans are such a high-risk product. They may require more documentation or have other questions for you during this time, so check your email and answer phone calls while you’re waiting to hear about the decision.

Step 4: Start The Closing Process

Next, you will receive a decision from the lender. If you’ve been approved, it’s time to start the closing process.

Now it’s time to move into the closing process. This includes going over the loan agreement, which will have all dates and milestones you’re required to meet throughout the process in order to keep receiving your funds.

Once the paperwork is signed and the closing process is complete, you’ll be on your way to expanding your business.

The Bottom Line On Commercial Construction Loans

Getting a commercial construction loan isn’t necessarily a quick and easy process. However, if you need to construct or renovate commercial real estate, it’s a great way to get the funding you need for even the biggest projects.

Whether you need funding for commercial construction or have other financial needs, make sure to get started with the best business loans for small businesses.