Commercial Construction Loans Explained

February 16, 2024

Commercial Construction Loans Explained

Expanding your business could require more capital. You may need a construction loan if you need readily available funds. Before applying for a commercial construction loan, here are a few things you need to know.

What Is A Commercial Construction Loan?

A commercial construction loan is a form of short-term financing to fund a construction project. These loans can finance the construction or even the renovation of a commercial building. However, they work differently from some other types of loans. The total approved construction loan amount is not given upfront like other types of loans. Instead, funds are divided and dispersed in phases rather than a lump sum. Lenders pay draws, or installments, to commercial builders in phases during the construction process. A construction loan lender will inspect the project with each step before they allot more funds. With each new construction stage, more funding gets released. These installments cover vital building phases such as:

Land grading and preparation
Foundation pouring
Framing
Finishing work
And more

Why Utlize A Commercial Construction Loan?

Construction loans help make investing in the commercial construction process feasible and more affordable when capital is needed to expand a business. Ground-up construction or renovations can be costly, and commercial construction loans provide access to steady building funds. On top of this, commercial construction loans don’t require interest payments on the entire loan right away. Borrowers are only required to pay for the amount that they have received. For example, if you plan to borrow $100,000, but have only utilized $50,000, you only need to pay interest on the $50,000 you have accessed. However, commercial construction loan interest rates can fall between 4 and 12 percent of the current loan, but better credit scores secure lower interest rates.

Commercial Construction Loan Extra Fees

Borrowers may also pay some extra fees on a commercial construction loan. These may include guarantee, processing, documentation, project review, and fund control fees. A down payment will be required to ensure that a lender feels comfortable funding the cost, and it may be approximately 10 to 30 percent of the total project cost.

Commercial Mortgage

After utilizing a construction loan, a borrower doesn’t repay everything immediately. Instead, borrowers enter into a commercial mortgage, where property is collateral and monthly payments on the loan begin. A commercial mortgage pays back loaned funds like a home mortgage or rental fee.

How To Get A Commercial Construction Loan

There are a few steps to consider when obtaining a commercial construction loan: Step #1: Contact a hard money or traditional lender to discuss your building project and financing. Step #2: Submit a loan application to a lender to decide whether they will proceed with funding the building project. Typically, the lender looks at the overall cost, scope projections, and builder background. Step #3: Review terms after a commercial construction loan is approved. The borrower reviews loan terms before being returned to the lender for the underwriting process. It’s crucial to ensure all the paperwork is completed as smoothly as possible during this step. Step #4: Agree on the terms and conditions before receiving the initial loan amount.

Choose Venue Construction For Your Commercial Building Project

A commercial construction loan can be vital to a building or expansion project. These loans can help investors build their real estate businesses more efficiently. At Venue Construction, we know how commercial construction loans work to fund a commercial building project. Contact us today to learn how you can partner with our team to use a commercial construction loan to make your construction plan a reality.