When a borrower is approved for one of these loans, the entire amount of the loan is not given to them up front. The lender and the borrower work together to devise a draw schedule. This determines what amount of the loan will be provided as the construction project reaches new milestones. One draw could be given when land is cleared, the next draw is provided when a building’s foundation is poured, the next draw is provided when the building’s frame is completed. Each milestone will qualify for the release of a new draw.
Once each construction milestone is completed, a lender usually wants an inspector to confirm the completion of the work prior to releasing the next draw amount. This is the process until each necessary construction milestone is completed and the entire amount of the loan has been paid. With a commercial construction loan, the borrower only pays interest on the amount of the loan they have been given.
Once the construction project is complete, the entire loan amount is due. Most companies are not able to pay one large payment to satisfy such a large debt. This is the time when the borrower can take out a commercial mortgage to pay off the commercial construction loan. In this situation, the property will be the collateral. A commercial mortgage will provide a borrower with a reasonable monthly payment they can afford pay over a specified period of time.
SBA CDC/504 Loan Program
This is a popular type of commercial construction loan. It requires a low down payment and provides competitive interest rates and has reasonable credit score requirements. This loan works with an SBA-approved Certified Development Company to fund as much as 40 percent of the costs to renovate a current facility, purchase as well as improve land or build a new facility. Borrowers can receive up to $5 million.
Depending on a company’s situation, a traditional commercial construction loan obtained from a bank could be a good option. The repayment terms, as well as down payment requirements, and rates will vary. It is common for a 10 percent down payment to be required with a 25-year repayment term. There are variable loan rates and fixed loan rates available.
This type of loan may be a good option with a loan-to-cost ratio that is low and a borrower may need to provide some additional money. This loan is secured with stock. If a company defaults on this type of loan, the lender can turn it into an equity stake. A mezzanine loan enables the borrower to have more leverage and can obtain a loan-to-cost ratio as high as 95 percent.
Once a company has determined a lender for its commercial construction loan, the application process must be carefully completed. A lender will evaluate the financials of the company owner as well as the company. Credit scores and other factors are used to determine loan approval as well as the loan’s terms, interest rates and more.
It is always exciting for a company when it reaches a point where it needs to expand. Getting financing can be a challenge, but it is always worth the effort. When a company understands the purpose for their loan, it will help guide them. Learning about the type of loans and requirements can make the loan process an easy experience.