Of course, we understand that any construction project can be costly especially for small businesses. Most of the projects require hundreds of thousands of dollars or even millions of dollars that many businesses cannot manage to raise up front.
Although expanding a business premise seems like a great idea, most of the business get stuck at the point financing the construction project. Getting money to pay architects and contractors can be challenging. However, a business that understands how commercial construction financing works will navigate this challenge with a lot of ease.
Commercial construction loans
A commercial construction loan is a great financial product for any business seeking to construct a new building for its business operations. This loan refers to funding that is utilized to meet the construction costs of commercial premises. Commercial construction loans are different from the typical loans in that they are short-term. Also, the lenders do not disburse commercial construction loans as a single batch; instead, the funds are released as construction progresses.
Why do you need a commercial construction loan?
If your current premises don’t meet the needs of your business, you may consider adding more space by either renovating or putting up an entirely new building. In such a case, you can get a commercial mortgage to fund the constructions costs of your project. The existing business properties are usually used as security for the commercial mortgage obtained from the bank.
Unfortunately, most of the growing businesses have little or no collateral to secure a commercial mortgage to fund their projects. In such a case, getting a commercial construction loan seems to be the best option for such a business. Commercial constructions loans are usually non-secured, and therefore the business doesn’t need to have any collateral to obtain them. The funds can be used to meet construction expenses such as purchasing construction materials, paying labor, and land development.
How commercial construction loans work
A commercial constructions loan is mostly used to fund the construction works. The loan is usually released in batches as the construction progresses. Before releasing the next batch, the lender will send a representative to check the progress of the project.
The best thing with a commercial construction loan is that you only pay interest on the funds released by the lender. This arrangement benefits both the borrower and the lender since the borrower will only pay interest on the released amount and the lender’s risk is reduced since the value of construction matches the disbursed loan.
The amount of interest paid on the commercial construction loan depends on how fast you complete the project. Once the project is complete, you can sell the property to pay for the principal amount, or you can apply for a commercial mortgage using the new building as the collateral. With a commercial mortgage, you can discuss with your lender for a flexible monthly repayment schedule.
Where to get a commercial construction loan
As a developer, you have a host of options when it comes to accessing commercial construction loans. Credit unions and banks can provide a variety of commercial construction loan options that include traditional loans, SBA loans, and mezzanine loans. For lenders with difficulties accessing commercial construction loans from mainstream banks, they can turn to hard money lenders to finance their construction projects.