The Commercial Construction Loan Process:

Whether you’re building a new space or remodeling an existing one—construction is expensive. Let’s break down the process and try to save you some money.

When developing or remodeling a commercial space, many people hit roadblocks around the same point: financing. You understand the project, construction estimates—but now that you’re searching for potential lenders, you’re overwhelmed. Let’s review the basics of the construction loans process to get your next project financed quicker—and with fewer headaches.

To review, construction financing entails a short-term loan (typically), which serves to fund both the construction costs of a project and the interest on the loan during the construction period and initial lease-up. When the construction is complete and the building fills to the market level of occupancy—long-term, or permanent financing, is now available to retire or pay out the short-term construction loan. When the lender commits to both short- and long-term structures it’s called a “mini-perm” or “construction-permanent” mortgage. In this case, the lender has agreed to fund the project from breaking ground to ribbon cutting, and even market stabilization.

First, the Paperwork

The first step is the most tedious, but most necessary. Most commercial construction loans require a mountain of paperwork to support the actual loan application. While the specific types of documents vary per lender, the following is a list of general information most lenders will require, at the very least:

  • A business plan
  • Personal / business financial documents
  • Contractor’s estimates

Selection Time

Next, it’s time to decide on both the type of loan you need and the lender you wish to pursue. Commercial construction loans can be both secured and unsecured—a secured loan equates to the borrower providing collateral (and in turn a lower rate is usually offered). On the other hand, an unsecured loan doesn’t require collateral but also is often paired with higher rates.

When choosing a lender, it’s also important to consider timing. Some lenders have longer approval and funding processes than others.   It may be more profitable to accept a higher rate on a short term loan from a lender who can provide expedited service.

Don’t forget to shop around. It’s wise to check out a variety of lenders as many offer different commercial construction loans, such as Small Business Administration loans and private investments—complete with varying requirements and terms. Check out a range of potential lenders before deciding on which options best suits your situation.

Application, Review, and Acceptance

After selecting a lender, you’ll need to complete the necessary paperwork for the application. The lender will review the application to evaluate the security risk of the borrower based on investors, age of the company, employee/partner strength of the business, and other stipulations. If the lender approves the loan, they will provide you, the borrower, with all information about the specific terms, including the payment plan and interest rates.

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