Understanding the Basics of Commercial Construction Loans

Renovations or new construction projects from the ground up can run hundreds of thousands – if not millions – of dollars. Short of having a bottomless bank account or a handful of investors with deep pockets, commercial construction loans are available to potentially meet your expansion or renovation project.

Different from say, a commercial mortgage loan, a commercial construction loan can be used to finance the construction or renovations of commercial buildings. It can be used to pay for part or even much of the costs of labor, materials, land development and more. Yet, given the amount of funds involved, there are a lot of criteria to consider before applying for one.

What Do I Need to Get Approved?

According to an article on merchantmaverick.com, commercial construction loans are considered high risk. As a result, business owners are commonly required to provide a down payment of between 10 and 30 percent of the total project cost (depending on the lender). So, having that sort of initial revenue is essential. Most lenders will very rarely lend 100 percent of the project costs.

Determining how much the lender will provide for your project is not difficult to understand. They commonly use what is called a loan-to-cost calculation. Simply put, they divide the total amount of the loan that is requested by the total amount of project cost. Lenders will also evaluate your business’ debt-to-income ratio (DTI), which is a ratio between the income and debt of your businesses on a month-to-month basis. Some lenders may want to see a business’ DTI of less than 43 percent, while other may have even stricter guidelines. To determine your DTI, divide your business’ total monthly debts by gross monthly income. Of course, the lower your business’ DTI, the better.

Requirements for loans vary and, in most cases, lenders will only consider low-risk businesses (or projects) with a strong credit rating. Merchantmaverick.com suggests having a credit score at least in the 600s or even the 700s before applying.

Be Organized with a Focused and Realistic Goal

After a close look at the financials, a detailed business plan will be required. It should include your business’ current operations, overall objectives, realistic projections, and of course, exact details of the project. In addition to entailing overall designs, concepts and all anticipated project costs, personal/business tax returns and personal/business financial documents are also required.

With a series of commercial property loans available and other important information to understand, it’s recommended to speak directly with your lender or financial advisor about your business goals. Having an eye towards the future is not a bad thing. Yet, that vision needs to be realistic and parallel with your business’ potential to successfully bring it to the next stage of success.