Are you looking to get your business off the ground with a commercial construction loan?
A commercial construction loan ensures that you receive critical funds when necessary, but it does not rack up a lot of interest because of its short-term advantages. Depending on your business needs and goals, there are plenty of financing options to consider.
We break down the different types of small business construction loans, how to apply, and how your business can increase its chances of qualifying for financing.
Types of Commercial Construction Loans
You will need to obtain most commercial construction financing through banks and commercial construction lenders. As you decide on the right construction loan, understanding and applying for the ideal financing option can raise your chances for success.
Below are the most common types of commercial construction and land development loans:
- Land development loan – ideal option when you have undeveloped or raw land that needs to be construction ready. Land development loans can go toward installing water, sewer, or power lines on the property
- Interim construction loan – a short-term option that is utilized to cover material and labor costs for a project in commercial development
- A&D (acquisition and development) loan – covers the cost to purchase land and the improvements needed for existing buildings and infrastructure. A&D loans are perfect for a deteriorating or underutilized property that has already been developed
- Mini perm loan – this short-term financing option helps fund an unsettled construction loan for commercial building that would drive income when completed
- Takeout loan – delivers permanent financing for projects where a temporary loan is in place
- Merchant cash advance (MCA) – this financing option is useful because a financing company delivers funds upfront in return for a percentage of the company’s future sales.
- Equipment Financing - can be used to purchase or lease equipment for the business
Applying for a Small Business Loan
Applying for a small business loan can be an efficient process once you understand these steps:
- Evaluate how much money you will require – outline a clear plan of your goals, how you will succeed in reaching these milestones, and the necessary capital to make this happen
- Determine which loan type meets your needs – the most common types of loans are commercial bank loans, SBA guaranteed loans, equipment loans, business line of credit, microloans, and accounts receivable financing
- Confirm your credit scores – you will need to check both personal and business credit scores
- Assemble the necessary documentation – you will need your company’s financial statements, financial projects, business tax returns, bank statements, licenses, and leases
- Know the exact value of your collateral – understanding this will increase your chances of getting a loan
- Shop around and apply for a business loan
Is a Business Line of Credit Best for Your Business?
A business line of credit is much like a business credit card. You have access to a max balance of money you can withdraw whenever you need it. In return, you make a minimum monthly payment based on the current loan’s balance.
In addition to the borrowing limit, you only pay interest toward the money you take out. You have the option to pay the minimum amount of the full balance each month. When you repay any borrowed money, you earn the right to withdraw these funds again up to your borrowing limit.
There are several reasons why a business line of credit can be advantageous commercial loan options. First, a business line of credit can smooth out cash flow. Not only can you pay your bills promptly, but you can earn discounts for automatic payments. A business line of credit also delivers financial support when your cash inflows from busy seasons cannot cover the lean months.
When you need to take advantage of a prime opportunity, a business line of credit can help push your business over the top. When your company wants to expand, increase marketing efforts, or participate in community events, a business line of credit can help invest in the necessary resources.
A business line of credit also puts these into perspective for what you need for the business. Typical loans can penalize you if you guess too high or low. A line of credit gives you a maximum balance of your cost estimates. Therefore, you only use what you need and pay interest on your usage.
Before you proceed with a business line of credit, it is essential to understand some of the drawbacks:
- Expensive – although not as costly as a business credit card, business lines of credit come with higher interest rates, occasionally over 20%.
- Time-consuming application process – the extended process requires you to provide personal and business bank statements, personal and business tax returns, profit and loss statements, resumes, and other business documents.
- Low limits – business lines of credit will typically have higher limits than a credit card but have a lesser limit than an installment loan.
Other Options: Equipment Financing
Equipment financing is when you utilize a loan to invest in equipment for the business. These equipment loans allow for periodic payments, which include principal and interest payments throughout a fixed term. After you pay the loan in full, you own all equipment exempt from any lien.
When you are opening a new location and need to fill the place with the necessary equipment, equipment financing is crucial. If it is a restaurant, you can utilize the loan for a refrigerator, oven, and commercial range.
Using a Commercial Loan Calculator
A commercial construction loan calculator helps you understand the true cost of your commercial loan. To effectively use the calculator, you will need to input information like the loan amount, term, and interest rate.
Once you complete the calculation, you can also view the loan amortization table. This table outlines the amount of each payment throughout the entire term. It also communicates the mortgage payment amount and how it affects your total interest and loan balance.
Where to Apply for a Commercial Construction Loan
The best commercial construction loan lenders are typically intermediary institutions that are SBA-approved. You can search your local area for credit unions, banks, and private lenders that provide 7(a) loans.
If you decide to go with a CDC/504 loan, you can approach a non-profit CDC that is also SBA-approved. Credit unions and banks can also provide traditional loans, mezzanine loans, and SBA loans. If you want to go the hard money lender route, you can work with a private lender to assist with short-term loans for commercial construction.
About the Author, Madison Taylor
Madison Taylor is the Brand Ambassador at ROK Financial. She is responsible for raising brand awareness and business relationships with business owners across the country. Madison loves that she plays a small role in getting Business Back To Business Through Simple Business Financing and looks forward to hearing what you think about the blogs she creates! Madison has been working in the financial space for six years, and loves it! When she is not at work, you will find her at home learning a new recipe to test out on her family or going on new adventures with her friends.