New construction loans for businesses in Montana are usually funded by a commercial construction loan. There are several types of commercial construction loans and different types of lenders. The construction process is lengthy and usually incorporates a commercial construction loan and a commercial mortgage to pay off the construction loan.
Commercial Construction Loan vs. Commercial Mortgage
Characteristics of a Commercial Construction Loan:
- Short terms
- Lengthy application process
- Disbursed on a draw schedule
- Draws are released after an inspection of the milestone
- Payments tend to be on interest until last payment is disbursed
Characteristics of a Commercial Mortgage Loan:
- long-term loan
- bulk sum used to pay for existing property
- low interest and monthly payments
Interest rates and fees for a commercial construction loan are determined by the lender and the type of lender or loan. Some fees for a commercial construction loan are documentation fees, guarantee fees, project review fees, fund control fees, and processing fees.
The requirements for a commercial construction loan include a down payment of 10% to 30%. Credit scores and financial documents are needed for review. Most lenders want to see the borrower have a debt to income ratio under 43%. Lenders may have stricter policies on the debt to income ratio and credit scores below 700. A lender will also review industry experience and construction plans. When the lender agrees to lend the funds, a draw schedule is made with the borrower.
Types of Commercial Loans for Your Business in Montana
The Small Business Administration offers two types of loans to businesses that want new construction to expand. The CDC/504 loan is for 10 to 20 years and has a fixed interest rate based on the US Treasury rates. Anyone that owns over 20% of the business needs to make a guarantee. The maximum amount for this loan is five million. The 7(a) Program has a term of up to 25 years. This program is used for buying an existing property or construction for a business. The most loaned to a borrower with the 7(a) Program is also five million.
A bank loan is a traditional commercial construction loan. The interest rates and fees are determined by the lender and the review of your application. A commercial mortgage is usually used to pay the construction loan at the end of the construction project. This gives the borrower the ability to have lower monthly payments over a longer period.
If a borrower needs a loan to meet the down payment requirements, a mezzanine loan has lower qualifications and helps bridge the funding gap. The interest rates higher than a traditional loan and if the borrower defaults the lender gets equity in the business.
Hard money loans are short-term loans that are easy to qualify for when one wants a short-term construction loan. These loans have a higher interest rate but usually, have a shorter application process.
Applying for a commercial construction loan is sometimes a prolonged process. Lenders will want financial information, detailed information about the construction process and other paperwork as they determine if they will fund the project. It is important to look at all areas of funding since you will have the time to look for funds while your application is under review.