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If you're planning to grow your business or are building your company from scratch, a commercial construction loan could help turn your dreams into reality. Sometimes referred to as a construction loan kind of finance is designed specifically for entrepreneurs and their financial requirements.
How do you define commercial construction loans?
If you are at the point where you are considering real estate development as the next step toward growing your business, then it could be time to find assistance to expand to that possibility. Since construction and renovations are typically outside companies' budgets, a loan to finance commercial construction could provide the flexibility needed to help you realize your goals.
How do commercial construction loans function
In contrast to most loans designed so that the borrower is paid the total amount of the loan in advance, Commercial construction loans are offered in pieces once the project reaches certain milestones.
To organize these payments, the borrower and the client work together to draw a schedule. Draw schedules are plans for a fee that break down the timeframe and the parameters for each payment for the loan.
As you progress through the construction process, the lender will likely need an inspector to check each step of your progress before releasing each draw. The draw schedule helps protect your lender and permits you to pay only interest on the amount you've received. This means that you cannot start earning interest on the entire loan from the beginning.
If it's time for the loan to be paid fully, after construction is finished, the property will be used as collateral for refinancing into the commercial mortgage. This way, you'll be capable of making monthly payments through the mortgage, and you don't have to pay the entire amount in one lump amount.
Commercial construction loans
1. Bank credit
In addition to the SBA, banks may also offer business owners and builders an unsecured line of credit to help cover costs during all construction phases. After the building is completed, you can refinance the short-term loan to a long-term or long-term loan for financing future projects and additional business costs.
Commercial loans made through banks can be used to:
- Build new facilities
- Modernize and upgrade facilities
- Expand buildings currently in use
While interest rates can vary between different banks, you will be able to get rates that are competitive to your financial needs. In general, terms for repayment that last for 25 years are the norm with both the option of fixed rate and variable rate offered.
2. The SBA CDC/504 Loan Program
The CDC/504 Loan program is offered via Certified Development Companies (CDCs) as community-based members that are part of The Small Business Administration (SBA). They provide long-term loans at a fixed interest for for-profit businesses with an estimated net worth of not more than 15 million and an annual net profit of under $5 million after federal income tax.
504 loans are not used to fund working capital. However, they can be used to:
- Existing buildings or plots of land
- New facilities
- Equipment and machinery that is long-term
Through this loan program, interest rates are determined by the current market rates for United States Treasury issues, and repayment terms are based on either the 10- or 20-year plans.
3. The SBA 7(a) Loan Program
For smaller businesses that are not for profit, SBA provides fixed and variable rate loans that range from $5 million under the 7(a) loan program. Companies that qualify for this loan must prove that they require funds to carry out the business goals.
7(a) loans are perfect for actual estate-related purchases. They can also include:
- Both long- and short-term working capital
- Refinance current business debt
- Buy furniture equipment, fixtures, and other supplies
The interest rates can vary through this loan plan, and repayment terms are as long as 25 years. If you have a fixed-rate loan, you may have an annual repayment plan established at the start of each project. If you have a variable rate loan, your repayments may be altered as interest rates rise or fall.
Preparing your initial loan application
Knowing the required information is crucial to speed up your loan application if you are planning to apply for a commercial construction loans. The lender will require specific information about your company and the project based on the kind of loan you're using.
Typically the lender will ask for the following information:
- A detailed business plan
- A timetable for the project
- A real-time amount of money for the development
- Details of construction and the goal of the project
You will have to submit documentation during underwriting to get your loan application approved. The underwriting process is an internal procedure in that your lender will determine that you can meet the criteria for your loan and assess the validity of the information you've submitted.
In this manner, your lender will be able to ask:
- Business and personal tax returns as well as tax forms for individuals
- Statements of bank accounts and balance sheets
- Debt schedules showing current debt obligations
After the lender accepts you, you will review your charges and the terms and draw the schedule.
Find long-term support
You can apply for commercial construction financing by defining your goals and providing the necessary details to be used in the underwriting process. Because commercial construction loans fund a wide range of expenses and their exact scope of coverage differs, it is crucial to choose a lender to offer the assistance and advice you require to make the best decisions for your company.
If you're a business proprietor looking for a reliable partner to help you navigate the following steps to the growth of your business, Contact us by calling Commercial Lending USA. Commercial Lending USA's experienced team of bankers is ready to help you navigate every process step. They'll assist in gathering the necessary documentation to start and help you sustain your business over the long run.
To control what the future holds for your business, contact Commercial Lending USA to discuss what we can do for your company.
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