How Do Commercial Construction Loans Work?

“Build it and they will come” sounds great in the movies, but how do you finance real-life construction for revenue-generating projects before the revenue is available? 

Commercial construction loans are designed to address this problem by making financing available up-front that can be repaid once your new facility starts generating income. They’re an essential tool for expanding businesses to finance new construction.

Let’s look at how commercial construction loans work, the financial challenges they help you overcome, and how to apply for one.

BUILDING BLOCKS: COMMERCIAL CONSTRUCTION LOANS

Suppose you’re a business owner or project manager looking to expand your business by building new facilities but without a lot of capital on hand. In that case, you likely face some major challenges. 

These include: 

• High upfront costs: Land acquisition, planning, permits, not to mention the actual cost of breaking ground on construction, all require significant capital that you may not have. 
• Cash flow issues: Managing ongoing expenses like material, labor, and equipment rentals can be challenging on a fixed budget.
• Unpredictable costs: Handling unexpected costs from weather events, supply chain disruptions, and late design changes can be difficult.
• Revenue gaps: Payments from tenants or buyers will typically not arrive until the project is complete, leaving gaps in funding.

Together, these factors can make it hard for many growing businesses to meet increasing demand by adding capacity. Failing to grow can lead to missed opportunities and difficulty reaching financial viability.

Commercial construction loans are specialized loans designed specifically to provide a solution to the challenges of growing a business. For many small- to medium-sized enterprises, securing a commercial construction loan is a viable way to turn their business dreams into reality with a new facility tailored to their needs.

HOW DO COMMERCIAL CONSTRUCTION LOANS WORK?

Commercial construction loans are widely available from credit unions, banks, and specialized lenders. While traditional loans can be used to support a range of business needs like new equipment, working capital, or expansion plans, commercial construction loans are intended specifically to fund construction projects or major renovations.

Here’s what they offer: 

Phased funding: Commercial construction loans differ from regular business loans in that money is disbursed not as a lump sum but in phases approved by your lender and designed to match progress on your project. 

Interest-only payments: In repayment, borrowers can make interest-only payments while the project is in progress. They then begin to repay the principal once construction is complete and the project has started generating revenue.

Flexibility: Funds can be used to cover a range of construction-related costs, including materials, labor, permits, and contingency expenses.

Bridging finance: A construction loan helps manage the cash-flow gap between breaking ground and when the completed project begins to generate revenue. 

Terms for commercial construction loans depend on the size of the funded project. Many projects will repay a construction loan over 15-20 years, while funding for major infrastructure projects may be repaid over many decades.

USES FOR COMMERCIAL CONSTRUCTION LOANS 

Commercial construction loans can be used for any type of building construction undertaken by a business, non-profit, or corporation. 

They can be used for building brand-new facilities, or renovating or expanding existing buildings. While they cannot be used to buy new equipment or business vehicles, Fibre Federal Credit Union offers equipment loans for those investments. They also cannot be used for working capital, or to fund any kind of ongoing business expenses like salaries, bills, or consulting fees. 

HOW DO I APPLY FOR A COMMERCIAL CONSTRUCTION LOAN?

Applying for a commercial construction loan does involve more steps than a regular personal loan because the loan is being made to a commercial entity, not a company. Lenders will also want to take a much closer look at your construction plans before approving any funding. Your lender will want to examine your company’s overall financial situation, as well as the viability of the project you are considering. Expect your lender to review your company’s business plan, cash flow, creditworthiness, and outstanding debt to assess your credit risk. Lenders will also check your building plans to make sure they represent a realistic extension of your company’s goals, and to ensure you are not overextending yourself by taking on too much at once.

When you contact the lender to apply, the loan officer may ask you to submit important documents to support your request. These can include:

• Project budgets
• Contractor agreement
• Construction blueprints
• Financial statements

This is done to provide your lender with all the available information about your project so it can be formally evaluated. It’s worth taking the time and effort to prepare for this step thoroughly, as it will go a long way in determining whether your loan is approved. Your lender will verify your financial information and project plans in detail. They assess risks and set loan terms, such as the interest rates you will be offered and the schedule for disbursal of funds. 

Commercial construction loan funds are disbursed in stages, or “draws,” as construction milestones are met. Borrowers usually need to request draws based on project progress, which is verified by inspections. This helps ensure that funds are available when needed while keeping the borrower accountable and limiting the lender’s risk.

BUILD A BRIGHTER FUTURE WITH FIBRE FEDERAL

Accessing a commercial construction loan is more than a transaction — it’s a partnership. Your lender will get familiar with your project before approving a loan and will stay closely involved in your project until completion. A good lender is also a strong adviser, offering insight on your project before loan approval and helping to keep you on track throughout the construction process.

At Fibre Federal Credit Union, we offer the best of both worlds. We’re a serious player with flexible loan terms and competitive rates, but as a community credit union, we also know where you’re coming from and how your business vision fits into the local economic ecosystem.

That’s why we keep our loan decision-making local — so you benefit from faster approvals by expert loan officers who understand your business’s vision for the future. Click below to get started.

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