Are you planning on availing of a commercial construction any time soon but don’t know where to start? You’ve come to the right page. In this article, we will be discussing commercial construction loans and the requirements that you need to have in order to qualify for it.
What is Commercial Construction Financing?
Commercial construction financing is a type of bank-issued financing designed for the purpose of constructing a real estate project. Basically, it can be considered as a type of loan, but it’s quite different from the others.
Traditional loans are often given upfront upon approval. On top of that, the repayment structure is set over a period of time.
However, the money from the loan is not given upfront with commercial construction financing. Instead, the borrower will coordinate with the lender to make a draw schedule. In other words, partial amounts of the loan will be given when project milestones are achieved. Most of the time, lenders will send inspectors to confirm the accomplishment of a milestone. This will continue until the project is completed and the total amount of the loan is provided.
Aside from how the money is given, commercial construction financing also differs in terms of repayment methods. Borrowers will only pay the interest of the part of the loan that has already been received instead of it being based on the full amount. They have the option to get a commercial mortgage once the construction is completed and the property will be used as collateral.
Suppose you are planning on availing a commercial construction loan. In that case, you can expect to pay between 4% to 12% worth of interest rates. Of course, those with excellent credit scores will get much lower interest rates. Other than that, the financial institution where you will be availing of the loan will also be another determining factor in terms of how much the interest rate will be.
The other fees involved with commercial construction loans can include the following:
- Fund control fees
- Documentation fees
- Guarantee fees
- Processing fees
- Project review fees
Requirements for Commercial Construction Financing
Now that you have a better idea of a commercial construction loan, let’s dive into the qualifications and requirements you will need to avail of it. Here are the basic documents need for the application:
Contractor Bids and Architectural Plans
When you go to a financial institution to avail a loan, you need to be prepared with the necessary documents. Among these documents, you will need contractors’ bids and architectural plans for commercial construction financing.
These documents will give the lender an exact idea of how much financing the project will need. This way, they can immediately start appraising its value and assess whether it’s worth investing in or not on their side.
It’s also a good idea to provide general background about the contractor of your choice for the construction. This will help banks identify whether they are up to the standards of the lender. Most of the time, you will need to fill up a constructor questionnaire. It’s best to opt for contractors who are willing to submit requirements to the lenders for the loan.
3 Years of Tax Returns
You will also need to provide your tax returns for the last 3 years. Suppose you are a corporation and there are other owners that have more than 20% equity in the business; they will also need to submit their tax returns. This is because they will also be considered as guarantors for the loan.
Current Profit and Loss Statement
This is also known as an operating or income statement. This is a financial report that is commonly required by lenders. This shows the revenues and expenses of the business within a specific period. This helps financial institutions determine whether the business has the capacity to repay what they are trying to borrow.
This financial statement totals all the revenue sources of the business and the expenses required of the operation. It tells the financial institution a lot of this. For example, is the business earning or losing money? Can they pay within the term required?
Another financial report needed when applying for a commercial construction loan is the business balance sheet. Unlike the income statement, this focuses more on the assets, liability, and capital of a business. It’s another essential document that tells the financial institution about the liquidity and profitability of the business.
When you apply for a commercial construction loan, lenders will look at your credit scores. They are more likely to approve your loan if your score is in the 600s.
However, suppose you have histories of foreclosures, bankruptcies, and defaults on previous loans. In that case, they might disqualify you for the loan, or they might ask for an explanation. Even if you have successfully explained and convinced them that you could pay your loan despite your negative credit history, you might be given a high interest rate because their risks of letting you borrow money are also high.
The documents required for a commercial construction loan can differ from one other. In that case, you might also need to provide the following:
- Debt schedule of other loans if there are any
- A credit application
- A business plan
- Details about the stakeholders of the company
The process of getting a commercial construction loan differs from one lender to another. However, since this type of loan involves large amounts of money, the application process often lasts for several weeks upto a few months to confirm your credentials and documents. The lenders might also ask for additional documents or interview you for clarification, so as much as possible, make sure to keep your lines open to expedite the process.
There are plenty of benefits for commercial construction loans. However, getting it is not as easy as you think. You have to accomplish plenty of requirements and go through the eye of a needle.