Ways To Finance Commercial Construction Projects
Understanding all the options for financing commercial construction cannot be evident.There are many options, but financing commercial property can be difficult if there isn’t enough cash flow to repay the loan.This blog will discuss the various loans available for commercial steel construction projects and the requirements for approval.These topics explain what to expect when you search for financing to finance commercial construction projects.
What are Commercial Construction Loans?
Commercial construction loans typically last no more than 24 months. This is the timeframe you will need to complete the construction of your building.The loan amount you can get will depend on your specific circumstances. However, the average amount is 75% to 100% of the construction costs.You can choose to have your construction loan closed once or twice. One-time-closing loans combine both the construction and permanent stages of a loan. Two-time-closing loans are two different deals.
What is construction finance?
Construction finance typically has two parts:
- Finance documentation
- Construction documentation
Construction companies are situated at the intersection of these areas and are subject to both sets of documentation.A construction company typically uses a particular purpose vehicle (SPV) to obtain a senior loan from the lender. The SPV may also be eligible for equity and subordinated debt from its shareholders or junior creditors.The borrower will then sign a contract with a contractor to build the home and appoint professional advisors (such as architects). To ensure smooth construction, the senior lender might select project monitors. The borrower may also sign pre-sale and lease agreements with potential purchasers or tenants.
Budgeting for a Commercial Building Construction Project
When you begin a commercial construction project, you must plan for every expense. It is essential to budget for unexpected expenses that don’t cause delays. These are some of the factors that impact the cost of commercial construction projects:
Localization:Either you have land, or you will need to buy it to build your commercial building. Sometimes, the site might need to be rezoned. This can increase the construction time and cost.
Types of Building
A hotel takes more time and money than an office building. A hotel needs many bathrooms, smaller rooms and individual electrical panels. The building type is a significant factor in the final cost of a commercial building construction project.
Materials:Many materials are required to build a commercial building. Therefore, it would be best if you accounted for all the items you will need throughout the project’s duration. Bill will finance your supplies, and you will be able to repay the money once the project is completed.
Finishes:These finishes include flooring, insulation, windows, insulation and walls. These finishes transform your building from a mere shell into something that can be used as a living space. You can also choose from a range of flooring options, including expensive or budget-friendly ones.
Labour:Sometimes, labour costs more than materials. It is essential to factor in the time it will take to complete the project. Also, keep in mind that not all labour costs are equal. An electrician may cost more than someone who does the framing.
Different types of commercial construction loans
Let’s now look at the most popular types of construction loans you can apply for.Land Development Loan:Undeveloped land (or raw land) can be used to obtain a loan for land development. However, the land must be constructed-ready.It may be necessary to install a sewer line or water lines to turn the land into a construction-ready area.
Acquisition and Development Loan
An acquisition and development loan can be used if the land is in good condition. There are many types of commercial construction loans.A development and acquisition loan pays for the cost of the land, as well as the improvements to the infrastructure that is necessary before the development can begin.
Mini Perm Loan
A mini-perm loan, which is a short-term loan that can be obtained from commercial banks, is temporary. This loan is used to settle large construction loans due for repayment once the project has been completed.After three to five years of income generation, the mini-perm loan can be replaced by long-term financing.
Get a Loan
This loan is used to finance projects with a short-term construction loan. Many construction loan lenders require you to obtain a takeout loan before granting a short-term loan.
Interim Construction Loan
This loan can be used to purchase construction materials and labour. The interim loans can be used for up to 36 months and are paid off when a long-term loan is in effect.
Crowdfunding
Crowdfunding allows small investors to pool their funds to fund specific projects. You don’t have to go to the bank to obtain a loan for commercial construction projects. Instead, you can sign up for a crowdfunding platform like Kickstarter or GoFundMe to raise funds.This kind of funding is now commonplace. More people are using it to raise money for small projects.Crowdfunding may be the best way to raise funds to build a green-friendly steel building in your community.
How To Finance A Commercial Building Construction Project
Even if the project is being done for a client, most construction companies will need financing to start and complete a commercial building. The client will pay a deposit, but it won’t cover all the project costs until it is completed and you receive your final payment.
Commercial Construction Loans
A few constructions apply to the bank for a traditional commercial loan. These low-interest loans don’t require payment until the building is completed. To qualify, however, you must have a high credit score.
Business Credit Cards
You can use part of your credit card to pay for the building costs if your company has high-limit business credit cards. You are responsible for the monthly payments and high-interest rates.
Conclusion
Finance will always be needed for construction projects. It is incredibly disadvantageous for businesses to pay cash upfront. This will reduce your cash reserves by a significant amount.This creates a large hole in your cash flow that will only worsen if you deal with problems. This can lead to liquidity problems, especially if there aren’t many assets that you can convert into cash.Businesses should seek financing instead of paying cash. Contractors can obtain loans to get the money they need. In a catastrophic financial crisis such as the COVID-19 pandemic, cash reserves are available to ensure that the company can access its cash. The financing also allows the company to extend its repayment time to several months, allowing it to maintain its cash flow.Construction projects can get financing in many ways. They could first use the contract they have with their client to contact a lender to finance the project. They could also apply for loans against future income using accounts receivable financing or revenue-based lending. They can also use cryptocurrency to finance construction.They can also use the contract to get additional raw materials.Despite its apparent advantages, financing can burden a construction company. Contractors should be informed about the types of financing available and for what purpose. This information will help you decide if you should take out a loan based on your circumstances.
