A commercial construction loan is a leading scheme available to small companies specializing in building business properties. These can be in the form of factories, retail outlets, hotels, restaurants, shopping malls, or office buildings. Corporate enterprises can use the funds from this finance mode to pay for the various costs they incur. The expenses include legal charges for sanctioning the construction, material costs, and wages to the laborers. Many companies even take out these loans to buy and renovate existing commercial properties.
Why do companies take a commercial construction loan?
Small companies conducting their business operations within the real estate industry often undertake expensive construction projects. The average costs of completing these projects within a specific deadline can run into millions of dollars. However, corporate enterprises can generate significant revenue on the completion and sale of these projects. Unfortunately, most of them might not have the cash-in-hand to finance their projects alone. These companies have to rely on external lending options such as a commercial construction loan in such a situation. It is a better option than applying for a mortgage which they have to repay in 10 years.
How does this lending scheme work?
A commercial construction loan differs from other similar lending schemes financial institutions may offer to small companies. In this mode of finance, the institutional lenders do not allow borrowers to receive the funds upfront. They work in consultation with the companies to formulate and implement a suitable withdrawal schedule. This implies the lenders release the funds to the companies at specific stages of projects’ construction. They might get the first installment when the local authorities sanction their land development proposal. The companies then get the next installment after completing the projects’ foundations. The lenders release the third installment to them after the erection of structure and so on.
Small companies need to fulfill the following eligibility conditions to apply for commercial construction loans:
- They need a business credit score that exceeds 600,
- The income statements of the corporate enterprises should indicate the operating profits is twice the debt, and
- Their debt-income ratio, as evident from the annual financial records, should exceed 43 %.
How to apply for commercial construction loans?
The companies need to complete the following application process for institutional lenders to sanction them this loan:
- Submit copies of their business plans, ongoing commercial construction activities, and future projections,
- Provide construction projects’ plans, specification, architect designs, and sanction documents,
- Submit financial statements indicating the expected costs of the project inclusive of contractor, material and labor expense estimates,
- Produce copies of the income statement, balance sheet, and tax returns of their business for the last five years, and
- Submit copies of the document showing their current debt obligations.
Applying for a commercial construction loan can help small real estate companies finance their upcoming building projects. This lending scheme is generally for a short period, carries a low interest rate, and has flexible repayment options. However, they should choose a reliable institutional lender who willing to offer them this loan. Its eligibility requirements should be lenient and should not have any hidden charges from the companies that offer these loans to the business.