When your business requires more space, there’s a good chance that you’ll need financing because the construction of commercial real estate isn’t cheap. Fortunately, when you simply don’t have the financial resources to pay for an expansion, a commercial construction loan could very well be the solution. As with every other areas of business, it’s always good to make an informed decision, so you’ll want to get a good understanding of commercial construction loans. Keep reading for insights into this loan product.
About Commercial Construction Loans
Commercial construction loans are provided for the purpose of financing the cost of building or renovating a commercial property. The money provided by the loan can be used for activities associated with developing a commercial property, such as required materials and labor. This applies to renovating an existing property and building a new property. Commercial construction loans can also be used for buying and developing land for a new property.
Business owners interested in buying an existing commercial property can obtain a commercial mortgage, which is a different loan product. A commercial construction loan is for the purpose of renovating your existing space or building a new property from scratch. Building or renovating a commercial property can be very expensive, sometimes costing millions of dollars. In fact, even businesses that have experienced tremendous growth often cannot afford the cost of commercial construction, which is why a commercial construction loan is beneficial.
How Does a Commercial Construction Loan Work?
Commercial construction loans are unlike other types of loans where you receive the entire amount of the loan and then start making scheduled payments each month for the agreed upon term. Because of the nature of commercial construction, there’s a different process that enables borrowers to work with lenders on what’s called a “draw” schedule. Instead of receiving the entire amount of money up front, you receive funds based on the draw schedule. Subsequently, partial payments are released when project milestones are met.
One example of a project milestone is clearing and developing land. Another milestone might be pouring the foundation. This continues throughout the project until it is completed and the entire loan is distributed. Generally speaking, an inspector will confirm each milestone prior to releasing the draw. This process is beneficial for different reasons, including the fact that you will only pay interest on the part of the loan that you’ve received. In fact, most commercial construction loans only require you to pay interest until the full amount of the loan is released.
Costs Associated with Commercial Construction Loans
Interest rates for commercial construction loans are typically between 4% and 12%, depending on credit scores. A down payment of 10% to 30% of the total project is usually required since it’s a high-risk loan, but the amount varies from one lender to the next. As with other loans, various fees will apply. There are different types of commercial construction loans, so you’ll likely find one that fits your unique needs.
What Happens After Project Completion?
At the conclusion of the project, you can pay the principal in one payment or choose a commercial mortgage. If you choose a commercial mortgage, the property itself will serve as collateral. This is often beneficial because it locks in affordable mortgage payments over an extended period of time.