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Louisiana New Construction Loans
If you want to expand your business in Louisiana, there are several funding options available for new construction. A commercial construction loan is a loan that supplies funding for renovations or a new building. There is a difference in how a commercial construction loan works compared to a commercial mortgage.
How are a Commercial Construction Load and Commercial Mortgage Different?
A commercial construction loan provides you with most of the funds you need for your land development and construction costs. A commercial mortgage is for business owners that want to buy an existing building. There are differences in how a construction loan and mortgage disperse funds. A mortgage disperses a lump sum, you buy the property and pay your principal and interest in monthly payments. A commercial construction loan disperses payments in stages. With the dispersed money, you do the work until the next milestone and then you get more of the loan. Borrowers tend to pay the interest on the construction loan until the last payment is dispersed. Then, they use a commercial mortgage to pay off the construction loan because the monthly payments are lower and over a longer period.
Requirements for a Commercial Construction Loan:
- Down Payment – Usually 10% to 30% of the cost to build.
- Credit Scores – High 600s minimum. Business credit score is also reviewed.
- A debt to income ratio below 43%
- A debt service coverage ratio above 1.25
- Good financial records.
- Construction plans.
The requirements for a commercial construction loan are set by the lender. They are not all the same and some are stricter than others. The same is said for fees and interest. The interest you pay is determined by the type of loan and lender you choose. The fees you pay may include fund control fees, guarantee fees, documentation fees, processing fees, and project review fees.
Commercial Construction Loans:
- Mezzanine Loans
These loans are used by many to produce a down payment for a commercial construction loan. The loan is secured by stock in the business. If you default, the lender gets equity in the business. The interest rates are between 12% and 20%.
- Hard Money Loans
A hard money loan is a short-term loan that is easier to qualify for than a bank loan. The interest rates and fees may be higher. These loans are from private lenders and most have a term of one year.
- Bank Loan
A traditional bank loan for construction is based on the funding, timeline of the construction project and qualifications. Once the construction loan is paid a commercial mortgage takes effect, if the borrower chooses this form of financing. The interest rates and monthly payments are lower with this type of loan.
- Small Business Administration
The SBA has two programs for commercial construction. The 7(a) program is used for either the purchase of an existing building or for construction. The terms are up to 25 years.
The CDC/504 loan term is for 10 to 20 years and the interest rate is fixed. A guarantee is needed from anyone who is an owner of 20% or more. These small business programs loan up to five million.
The application process can be lengthy. Having all your financial and construction paperwork in order will help the lender go through everything in a shorter amount of time. Lenders may request more information as they review your documents.