Everything You Need To Know About Getting a Construction Loan

You’re ready to complete that next commercial construction project, whether it’s an office renovation or a new business location. When you call up a couple contractors for estimates, everything seems out of your budget. This project is the next step to grow your business, but the money isn’t exactly available right now. What can you do? Consider applying for a construction loan. 

Before you apply, make sure you know what a construction loan is and easy ways to get the best one for your project. 

What is a construction loan?

A construction loan is given by a bank or loaning agency to cover the upfront costs of a construction project. Usually, the money loaned must be used in a specific time frame and the business or individual who took out the loan must present evidence that construction is underway. 

Interest rates for these loans can range from 4-12% and a downpayment of up to 30% is often required. Unlike other loans, these operate on a draw schedule. This means you can withdraw a certain amount of the loan money when the construction project hits certain milestones. 

For example, if your bank gave you a loan of $300,000, the draw schedule could allot $50,000 for the initial start-up costs, with $100,000 more becoming available once the foundation for a new office is built. The rest of the money would be available when other project milestones were hit, as laid out in the contract.

Why would you need a construction loan?

Let’s face it: construction is expensive and very few of us have hundreds of thousands of dollars readily available. Construction loans allow you to make more manageable payments towards your project in monthly increments and they give you the upfront capital to get the project done.  

Commercial building

Both individuals and businesses need construction loans for a variety of projects, from homes to office spaces to healthcare facilities. The main difference between an individual loan and one for a larger scale commercial project comes down to the scope and amount given. 

5 tips to get the best loan for your project?

As you might have already guessed, not all construction loans are equal. Some are designed for home renovations while others are for companies looking to add a new storefront or renovate a current office space. If you’re in the latter category, here’s five easy hacks to get the best loan for your project and to save money in the long-run:

  1. For the best interest rate possible, make sure your business and personal finance history is credible. A bank will look at your credit scores, tax returns, cash flow, assets, bank activity, and business plan to determine how big of a risk your construction project is. 

  2. It might be more difficult to get a loan for construction equipment than to hire a contractor to complete the project for you. This is because there’s increased risk if your team is operating equipment and additional assets a bank must appraise before they can give you the loan. Consider partnering with a good contractor to cut costs. 

  3. Usually, it’s easier to get a bigger loan as an established business than as a start-up. While loans can go up to 20 million per project, don’t expect that much if your company is newer. 

  4. Consider the 504 loan program from the Small Business Administration. This loan has a fixed rate and can be paid back over 10-15 years, making it a manageable option for many small businesses. 

  5. If your project is bigger, the Small Business Administration also sponsors a 7(a) loan which allows businesses to borrow up to seven million. This loan also has a fixed rate and needs to be paid back in 10-25 years. 

Whatever the size and scope of your project, a construction loan might be what you need to get the project done. If you still have questions, consider talking to both your contractor and bank to see what options are available. 

Carlton Building Services in Hampton Roads Virginia

Carlton Building Services specializes in repairs, maintenance, renovations, remodelings and build-outs for a variety of clients in Hampton Roads, Virginia Beach, and Chesapeake areas. We have years of experience handling projects in the retail, office, and healthcare space and would love to work with you on your next project!

To learn more about our services, check out past project highlights or contact Carlton Building Services to see how we can help with your next project. 

JP Carlton

J.P. Carlton

J.P. Carlton is the founder of Carlton Building Services, a Hampton Roads-based construction company.