Does your business need funding for its next construction project or equipment purchase? With commercial construction financing, you can get the loan you need to grow your business.
There is a construction financing solution for you, whether you have a large project in the works or an upcoming machinery purchase. Learn more about commercial construction funding and what you should consider when choosing a lender.
How Does Commercial Construction Financing Work?
Commercial construction financing for building projects works a bit differently than other types of business loans. Rather than receiving all of the funds at once in a lump sum, most construction financing is structured around a draw schedule.
This is where borrowers and lenders create a plan with project milestones thanks to this incremental funding method. After a construction financing milestone is finished, an inspector will visit the job site to confirm that the work has been completed.
If it has been completed, the next draw will be released. This process will be repeated until all of the milestones are reached and all of the funds have been distributed. It’s also important to note that interest is only charged on funds that have already been released.
If your construction company needs equipment financing, the process will be similar to other types of traditional business financing. In most cases, machinery purchased with construction equipment financing is used as collateral for the loan, meaning if the borrower defaults, the lender can sell the equipment to cover the cost of the loan.
What Is Needed for Commercial Construction Financing?
Since construction loans are a higher risk than other types of financing, construction financing lenders need proof that you can repay the loan during the application process.
Requirements typically include the following:
- Personal and business tax returns
- Profit and loss statements
- Balance sheets
- Bank statements
- Income statements
- Debt schedules with current debt obligations
- Future business projections
- Operating history and proof of time in business
- Project details, including cost estimates
- A good credit score of a high 600 or greater
- A valid form of identification
How Long Can You Finance Construction Equipment?
The terms for construction equipment financing can vary from 12 months to six years. Since the equipment serves as collateral for the loan, lenders typically won’t offer loans for longer than the projected service life of the equipment. Therefore, loan terms will likely depend on the type of equipment that you’re purchasing.
Can You Finance Heavy Equipment With Bad Credit?
With the equipment serving as collateral for the loan, heavy equipment financing is a little easier to qualify for than other business loans, even for borrowers who have bad credit.
While most lenders want you to have a credit score of at least 600 in order to qualify for these loans, it’s not the only factor they consider. Lenders will also take into account how long you’ve been in business, your cash flow and your ability to pay a down payment.
Do I Have to Put Up Collateral With Equipment Financing?
Most equipment financing companies require borrowers to put the equipment purchased with the loan as collateral. In the case of non-repayment, the lender can then sell the equipment to recoup their costs.
Things To Consider With Commercial Construction Financing
When trying to choose the best commercial construction or equipment financing for your business, it can help if you keep the following factors in mind.
Fees and Interest
Although construction financing can supply your company with much-needed funding to build projects and purchase heavy equipment, the fees and the interest that come with the loan will mean your purchase is going to cost more than it would if you had bought it outright instead.
These fees and interest rates vary by lender. They will also depend on your situation as well as your specific financing needs.
Here are some standard fees associated with commercial construction financing for business projects:
- Documentation fees
- Processing fees
- Guarantee fees
- Appraisal fees
- Project control fees
- Fund control fees
Interest rates vary, but they are usually somewhere between 4% and 12%. Borrowers with better credit scores can expect lower interest rates than those who have bad credit. Also, construction loans from a bank usually have a lower interest rate than the ones from hard money lenders.
Credit Score
Most commercial construction financing lenders require a credit score in the good range of the upper 600s or greater. Since this type of financing is considered to be high risk, the lender will want to ensure your creditworthiness as well as your ability to repay the loan.
Also, the better your credit score, the lower your interest rates. Your general credit history is also going to be considered during the loan approval process, as is your business credit score.
These factors, such as your personal credit score, will directly influence your eligibility and your interest rates.
Debt-To-Income Ratio
Commercial construction financing lenders will also look at your debt-to-income ratio (DTI) when determining your loan eligibility. Your debt-to-income ratio depicts how much business income versus debt your company has.
DTI is calculated by dividing your total monthly debt payments by your gross monthly income. Most lenders look for a DTI of 43% or less. While some lenders may have stricter requirements, the lower your DTI, the better your chance of securing construction financing.
Down Payment
For building construction financing, a down payment is required. This down payment is typically equivalent to between 10% and 30% of the total cost of the project. Since this type of financing is considered high-risk, the down payment will reduce the lender’s risk of offering you a loan.
Down payments for construction equipment financing are not always necessary, and they tend to be lower as well. Additionally, since these types of loans use the equipment purchased with the loan as collateral, they do not pose as great of a risk to the lender.
Financial Institution
There are many lender options for commercial construction financing. Depending on your company’s needs and your financial situation, there is a financial institution that will grant you the opportunity to secure a loan as long as you know where to look.
Banks and Credit Unions
Banks and credit unions are great options for many kinds of business loans, including commercial construction financing. While terms, rates and down payments vary, borrowers who are in a solid financial position and have excellent credit often find these loans more affordable than other options.
Fixed and variable interest rates are available, though keep in mind that a minimum down payment of 10% and a maximum of 25-year repayment terms are common. However, qualifying for construction financing at a bank or credit union is more difficult than it is with other financial institutions.
Hard Money Lenders
Hard money lenders are private lenders that offer short-term funding for construction projects and real estate. Rather than relying on the borrower’s creditworthiness, a hard money loan is backed by real estate collateral. As a result, these loans have lower upfront costs and they are able to offer faster funding as well.
While this type of commercial construction financing is easier to secure than traditional options, there are some significant drawbacks. For example, interest rates are higher, as most of them fall between 9% and 21% of the total value. Term lengths are typically less than one year as well. Also, if you default on the loan, the lender will take possession of the asset that was used as collateral.
SBA Loans
Small Business Administration (SBA) loans are a popular option for commercial construction financing. This loan program was designed to promote small business growth and job creation. It can be used to purchase or construct fixed assets as well, such as business facilities and machinery.
Qualifying for an SBA loan is more complicated than the process of qualifying for other commercial construction options. However, qualifying businesses can benefit from 90% financing, interest rates lower than those of traditional loans and 20-year loan terms.
Your business must meet the following requirements to qualify for an SBA loan:
- Tangible net worth less than $15 million
- Average net worth less than $5 million
- For-profit business
- Owned by U.S. citizens or permanent residents
- Proof of financing to create one job per $65,000 of funding
Grow Your Business With Commercial Construction Financing
There are many options available for construction financing. The right one for your company will depend on your company’s financial situation and project needs.
From bank loans and SBA loans to hard money lenders, you can find a construction or equipment financing option with loan terms, interest rates and a down payment that works for your business.