The purpose of a project financed through one of these loans can vary, as companies can either aim to create more office space for their staff or they could also be looking to expand their warehouse capacity to increase inventory levels.
Whatever the purpose is, these loans are specifically designed for construction projects, and they usually feature longer credit terms due to the lengthier useful life of the assets that will emerge from the project.
Moreover, commercial construction loan rates tend to be lower than those of traditional business loans – although other variables enter the equation in determining the actual cost of borrowing – since the cash flows that will be used to pay back the loan usually come at a slower pace compared to those of loans that are invested in more liquid assets like inventory.
Throughout the following article, we will explain a few more details about this type of loan along with some recommendations on how to shop around to find the most competitive commercial construction loan rates.
How do commercial construction loans work?
Like any other type of loan, commercial construction loans require going through an application process in which the borrower will present certain documents that will provide further explanations about how the funds will be used.
In most cases, lenders like Camino Financial – a fintech that specializes in providing funding to small and mid-sized businesses in the US – will ask business owners to present a business plan along with a detailed blueprint of the project they are seeking funds for.
Additionally, there is a minimum criterion that businesses have to meet to be eligible for one of these loans such as a minimum annual revenue. Also, the creditworthiness of the business owner – as reflected by his credit score – also plays a role in determining the candidate’s eligibility.
It is important to note that commercial construction loan rates typically vary depending on the company’s financial situation and the creditworthiness of the business owner.
Are commercial construction loans specifically designed for construction businesses?
Commercial construction loans are available for businesses of all nature and industries. However, construction companies usually find these loans more convenient than traditional loans as they are specifically designed for projects that have a long-term scope and whose positive cash flows tend to come in after a few years have passed.
With that in mind, if you have a construction business you should consider applying for this type of loan for your projects rather than traditional working capital loans or credit lines, which typically offer shorter credit periods.
In fact, in some cases, commercial construction loans can be structured in a way that installments grow progressively as the project advances, allowing the construction company to keep its financing costs under control while cash flows remain negative.
Where can you find commercial construction loan providers?
In the United States, there are both private and government-backed alternatives when it comes to finding the best commercial construction loan rates.
You can shop around for private alternatives such as Camino Financial, a lender that offers loans of up to $400,000 for eligible businesses, or you can also go to Certified Development Companies (CDCs) which are institutions backed by the Small Business Administration (SBA).
These institutions are allowed to offer up to $5 million to prospective borrowers, a portion of which are backed by the SBA, while the borrower usually has to put down 10% of the cost of the project.
In the case of private providers like Camino Financial, the credit period ranges from 24 to 60 months with annual commercial construction loan rates starting at 12%.
Meanwhile, for SBA-backed loans, the cost of borrowing usually starts at 7.75% but the credit period is longer – usually up to 20 years.
Whether you own a construction company or you are just looking for a way to finance a construction project for your business, commercial construction loans are a great alternative to secure the funding you need to execute your idea.
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