Business is booming and you need to expand your premises to handle the increased operations. The expansion may involve renovating the existing premises or constructing an extension to the existing commercial unit. For some, it may involve setting up a whole new office block.
Whatever the case, that’s a huge and costly investment. Your business, like many others, may not afford such an enormous cost.
That’s when you need to apply for commercial construction loans for such a project.
What’s a Commercial Construction Loan?
A commercial construction loan covers the costs of putting up or renovating a commercial property. The financing pays for the labor and materials used for the construction of new commercial buildings or renovations on existing business premises.
How Do Commercial Construction Loans Differ From Other Loans?
Commercial construction loans mainly differ from other loans in the manner in which financiers release funds for the project. Unlike other loans where funds are drawn all at once, commercial construction loans involve the release of funds in tranches based on a “draw schedule”.
Funds Released in Tranches
The financier releases funds for labor and for the purchase of materials after predetermined project milestones have been achieved. For instance, the construction schedule may define milestones such as the clearing of the land, foundation preparation, setting up the superstructure, finishings, and so forth.
Inspection By Milestone
Once a milestone is completed, the bank inspects the work to ensure compliance with agreed plans. The bank then releases the amount required to cover the costs of the next milestone. In the meantime, you’ll begin to repay the interest on the amounts you’ve been advanced by the bank up to that point.
Lumpsum Payment
Once you complete the construction, the bank expects you to repay the entire loan back as a lumpsum payment. However, that’s not what usually happens.
Instead, the bank uses the completed property as collateral and advances a commercial mortgage loan. The mortgage pays off the construction loan leaving you with a longer repayment period and affordable monthly installments.
As you can see, commercial construction loans differ sharply from personal loans. You may use the proceeds of personal loans for whatever project you choose. However, commercial construction loans are strictly channeled to fund the construction or renovation of a commercial property.
Benefits of a Commercial Construction Loan
Commercial construction loans are associated with stringent approval criteria, a short repayment period, high-interest rates, a huge down-payment, and strict disbursement procedures.
Nonetheless, they deliver several benefits to businesses.
- You build a property as per your design unlike in a mortgage loan scenario where you purchase a ready-made property. Moreover, you verify that the quality of materials used is of high quality.
- The inspection by the financier offers an extra layer of protection against shoddy work.
- Stringent project timelines by the bank will mean the contractor will likely deliver the project in time saving you money and inconvenience.
- During the construction period, you’ll only pay the outstanding interest and not the principal.
- The opportunity to convert the commercial construction loan to a mortgage when you’re done with your construction. Mortgages have longer repayment periods that you can match with monthly cash flows.
Is A Commercial Construction Loan Different From A Business Loan?
No, a commercial construction loan is an example of a business loan. There are other types of business loans such as commercial mortgages, and SBA loans.
How To Use The Money of a Commercial Construction Loan Wisely
Before embarking on a major project like construction do a thorough appraisal of the financial feasibility of the venture. This ensures value for your money.
Commercial construction loans are usually channeled to the purchase of materials and payment of contractors. Negotiate for the best deal on the purchase of materials and labor costs by contractors. This will ensure you make the most of your commercial construction financing.
Conclusion
Commercial construction loans come in to help businesses expand their premises, put up new office blocks, or renovate existing buildings. The funds are strictly used to fund the construction project while personal loans have no restrictions on how you use the funds. Reach out for a commercial construction loan if your business needs to boost its expansion.