Are you a business owner who wants to expand in California? Maybe you would like to move from a rental office space to owning your own building, or are you interested in making renovations to your current office building? If you are planning your next steps toward expansion, you may want to consider a commercial business loan.
Many growing businesses need to make renovations and expansions to be successful, but new construction projects can cost thousands to millions of dollars to complete. Many businesses don’t have the cash to cover the cost of new renovations and construction projects. In these circumstances, a commercial construction loan can be helpful.
What is a Commercial Construction Loan?
A commercial construction loan is used to help California business owners cover the costs of constructing or renovating a building. The funds from a commercial construction loan can be used to pay for materials, labor, and even purchasing the land for a new building.
A commercial loan isn’t a commercial mortgage. A commercial mortgage is made for business owners who want to purchase existing office properties. A commercial construction loan is for business owners who want to construct a new building or make renovations to an existing building.
Commercial construction loans are different than traditional loans. With traditional loans, the borrower will be issued one lump sum. After the funds have been disbursed, the borrower is responsible for paying back the loan, which is usually under monthly payments. Traditional loans have a payment period of at least 10 years.
With a commercial construction loan, the funds will be disbursed throughout the construction project. When you are taking out a commercial construction loan, you will meet with the lender to establish a draw schedule. A draw schedule will allow funds to be disbursed at the end of each project milestone. For instance, the first draw may be after the contract has been signed to purchase the land, and the second draw may be after the foundation has been poured. In most circumstances, the lender will send an inspector to the project site to confirm that the milestone has been completed. This process will be continue until the project is completed.
Another difference between a commercial construction loan and a traditional loan is how they are repaid. A commercial construction loan only requires that the borrower pay on the interest of the money that has been disbursed. For instance, if a business owner took out a commercial construction loan for $550,000, but he or she has only been paid $200,000 of the total loan amount, then the borrower will only have to pay for the interest on $200,000. Business owners with good credit will have lower interest rates when it comes to commercial construction loans.
Once the project has been completed, the borrower can pay the remaining principle in one sum, but there are other options for borrowers of a commercial construction loan. If a business owner doesn’t want to pay the full amount, then he or she can opt to take out a commercial mortgage. A commercial mortgage uses the property as collateral and enables the borrower to pay the commercial construction loan with the funds from the commercial mortgage. This allows borrowers to make fixed monthly payments that are more affordable than paying the principle balance at once.
Be Prepared When You Apply!
If you are applying for a commercial construction loan, you should have a business plan prepared to let the lender see each step in the construction project. In addition, lenders typically ask for cost estimates of labor, materials, and other materials.