Indiana New Construction Loans
New construction loans for business in Indiana are called commercial construction loans. These loans are different from a commercial mortgage and you can apply to different types of lenders. Banks are the traditional lenders but there are also hard money loans through private lenders, Small Business Administration programs, and loans that help bridge the down payment gap. A commercial construction loan is for new construction or renovations, while a commercial mortgage is used for existing buildings. Many times, a business will use a construction loan and a mortgage after construction is finished.
A commercial construction loan is not paid in a lump sum like a mortgage, it is disbursed in increments according to a draw schedule. A borrower lets the lender know when a milestone in the project is met, the lender sends an inspector to check that the work is done, and the next disbursement is made.
Usually, a commercial construction loan is designed for borrowers to pay interest until the last disbursement is made. The borrower only pays interest on the amount that is already disbursed. Then, the borrower gets a mortgage to pay the sum of the construction loan. With some programs and loans in Indiana, this isn’t necessary.
Interest rates are between 4% and 12% for commercial construction loans with a traditional lender. Other loans, like hard money loans, will have higher interest rates.
Construction loans for businesses have several fees attached. These fees depend on the lender and the loan.
- Project review fees
- Guarantee fees
- Documentation fees
- Fund Control fees
- Processing fees
How Much is the Down Payment?
A down payment is needed for almost every type of commercial construction funding. The down payment is usually 10% to 30% depending on the lender’s requirements. Some loans specialize in bridging the gap between the amount a lender gives the borrower and the full amount needed for the construction project.
Is Your Business Eligible for a Commercial Construction Loan?
Not all businesses are eligible. Lenders spend a lot of time determining how high the risk is for lending you money. Lenders will check:
- Personal credit score
- Business credit score
- Debt-to-income ratio
- Debt service coverage ratio
- Financial information for the business
- Experience in the industry
- Construction plans
Types of Funding for Commercial Construction
- Small Business Administration (SBA) Programs
Two programs with the SBA offer funding for business expansion via new construction.
The SBA CDC/504 loan program requires a credit score in the high 600s. This program pays 40% through a development company and another lender pays 50%. The borrower pays the remaining amount.
The SBA 7(a) Loan Program is used for the construction or purchase of commercial real estate. Terms for repayment are up to 25 years.
- Bank Loans
A traditional loan with lower interest rates than most other funding. Repayment is usually 25 years. The standard down payment is 10%.
- Mezzanine Loans
These loans can bridge the gap between what a lender gives a borrower and the total costs of the project. Some money for a down payment can come from this type of loan. Stock secures the loan. If the borrower defaults, the lender owns equity in the business.
- Hard Money Loans in Indiana
A hard money loan can help with construction expenses. They are short-term and are through private lenders.