A commercial construction loan can help you grow an existing business or launch a new one. Here’s what you need to know about financing your building project.

A commercial construction loan can be exactly the right financial tool to grow an existing business or launch a brand new one. However, if you’re new to construction borrowing, the process can seem complex at first. To help you understand the ins and outs of this type of financing, here are the basics.

The commercial construction loan application

As with any other type of loan, the process starts with an application. Like other loans, the lender uses information from your application to determine your credit worthiness.

If you’re the business owner, your personal credit score will be reviewed. Your business credit score will also be factored in. In general, credit scores need to be at least in the high 600s. Some lenders require a score in the 700s.

Lenders will also request supporting documentation, including:

• The last three years of tax returns for the business and any owners with more than 20% equity.
• Your company’s most recent profit and loss statement.
• The business balance sheet.

They may also ask for resumes or CV for stakeholders, personal financial statements, business plans and other documentation.

Lenders will also want to see the building plans, specs and budget for the project. They’ll also be interested in the builder’s experience and financial standing, which are critical to the project’s success.

Underwriting: the lender’s decision-making process

When your lender has all your documentation, your application gets turned over to their decision makers, known as underwriters. Underwriters asses a borrower’s ability to repay a loan and conduct a thorough analysis of the borrower’s credit, capacity, capital and collateral. (At Consumers, all underwriting decisions are made locally by people who live and work in your community.)

Using the financial data you provide, underwriters will look at several ratios, including:

• debt-to-income ratio (DTI), calculated by dividing total monthly debt payments by gross monthly income
• debt service coverage ratio (DSCR) which measures cash flow available for repaying debt.

Commercial construction loan approval and administration

If your commercial construction loan application is approved, your project can get started. Hurray! However, you need to understand that there are some key differences between construction loans and other types of loans.

First, you don’t get all the money up front. You receive a portion of the overall loan amount on what’s called a draw schedule. As pre-determined milestones are reached, you can draw on more funds. For example, a milestone for releasing funds may be when the foundation is poured. Another milestone could be when the framing is complete. As the project progresses, an inspector confirms that the work has been done.

The second key difference about commercial construction loan, is that you only pay interest on the funds that have been lent. If you’ve drawn $200,000 on a $500,000 loan, you only pay interest on $200,000.

The third thing commercial construction borrowers must know is that construction loans are usually temporary. The entire loan amount gets refinanced when the project is complete. Most borrowers’ loans convert to a commercial real estate mortgage loan that may have a lower interest rate than their construction loan. The real estate mortgage loan is secured by the newly constructed project as collateral.

In the case of a Small Business Administration (SBA) 504 loan, mortgage repayment terms are available up to 25 years at a fixed interest rate.

Get personalized help

Every commercial construction loan is different and this quick guide can’t cover every scenario. At Consumers, we help business members with loans for up to $5.5 million. To get personalized help, call us at 800-991-2221, or contact one of our commercial loan officers who are experienced in helping local companies get commercial construction loans, including SBA 504 loans.

Do you have business checking or other banking questions? Contact our knowledgeable commercial loan officers or call 800-991-2221. We’re here to help grow your business!

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