Commercial construction is an expensive venture. Whether you are in the business of setting up commercial buildings or are merely looking to have a building for your business, you will incur high costs throughout the construction period.
It is common for people and businesses to result in taking up loans to finance these projects. After all, not many have the kind of money that would facilitate a whole construction lying around. Banks and lending institutions are usually more than ready to lend deserving parties in the form of commercial construction loans.
A commercial construction loan is a loan you receive to finance the construction or renovation of a commercial building.
Whether you are a business or individual looking to get into commercial construction, it is important to understand the kinks involved in commercial construction loans and how they work.
Commercial Construction Guide
Unlike other loans, your lender will not provide the full amount in one lump sum. Instead, money is disbursed in partial amounts according to the draw schedule decided upon by you and your lender. This draw schedule involves a pre-arranged milestone system. For example, you will receive money for land development, laying the foundation, etc.
Each time you hit a milestone, your lender will involve an inspector to confirm that the work meets the requirements before releasing more money for the next milestone. This goes on until the full amount is released.
When it comes to paying interest for the loan, you will only pay interest for the amount disbursed. For example, if you are taking a $1 million loan, and the lender has only managed to provide you with $500K, you will only pay interest for the $500K. This way, you will only pay interest until the whole amount if disbursed.
Borrowers can then pay the principal amount in a lump sum once the construction of the project is complete.
Construction Loan Payment
The borrower does not have to make one large payment for commercial construction loans. Instead, they can receive a commercial mortgage from the lender, turning the already completed property into collateral.
You can then use the amount received from the mortgage to pay off the loan before embarking on making more favorable monthly payments. The payments can also be spread over a long period of time.
Fees and Interest Rates
You are likely to encounter a number of fees before getting your commercial construction loan. They include:
- Guarantee fees
- Processing fees
- Documentation fees
- Project Review Fees
- Fund Control Fees
You will also be required to pay a down payment of about 10% -30% of the total project cost. This alleviates some of the risks the lender is bound to undertake.
Interest rates range between 4-12% depending on your credit score. The better your credit score is, the lower the interest rates you will be charged. The kind of lender you work with will also determine how much interest you pay. Banks tend to charge lower rates than other lenders.
Types of Commercial Construction Loans
There are different types of commercial construction loans. They include:
- SBA CDC/504 Loan Program (Small Business Administration (SBA) CDC/504 loan). These loans are most popular because they come with low down payments, low-interest rates, and favorable credit score requirements.
- SBA 7(a) Loan Program- These loans are ideal for buying or constructing real estate. Borrowers can get up to $5 million with a repayment period of up to 25 years.
- Bank Loans- Bank loans require that one pays a minimum down payment of 10% and can provide you with a maximum payment period of 25 years. Borrowers can also get fixed and variable rates.
- Mezzanine Loans- This loan is a type of loan that is usually secured with stock.
If you are looking for a commercial construction company, look no further than Headwaters Construction Inc. We offer professional construction consulting and planning, general contracting, building or property maintenance, and tilt-up construction.
The Mechanism Behind Construction Loans