Construction Loans

When your business has special requirements, it may be time to take a construction loan to modify an existing property or build from the ground up. Construction loans can help finance every stage of your project. From land preparation and infrastructure to final inspection, construction loans keep your project moving.

Overview

A construction loan is a financing option specifically designed to cover the cost of construction and renovation on real estate property. Funds from these loans can be used only for the intended project and don’t cover operating costs. The loan can take many forms, depending on your business’s needs.

Land Development

Development loans cover permitting, subdivision of plots, construction diagrams and laying infrastructure like sewer and electric. Funds can be used to prepare raw land for construction. This includes breaking ground, installing utility infrastructure, securing the necessary permits, and grading hard surfaces.

Building and Construction

After land has been prepared, construction can begin. Construction-only loans can cover every stage of construction, from the foundation to the roof. To qualify, a business must submit detailed plans and hire a reputable contractor. After a set of construction milestones are agreed upon, the lender releases funds once each has been completed. Should construction halt for any reason, the borrower is not responsible for paying back the unused portion of the loan.

Long Term Financing Options

Construction-to-permanent loans work just like the loans described above, except that they roll over into a long-term loan after the construction is over. Instead of repaying a lump sum when the loan is mature, the loan is converted and the borrower pays over a longer time frame. With construction-to-permanent loans an owner can avoid refinancing construction loans into a long-term loan.

Renovations can also be covered with a construction loan. Depending on the size of the project, financing may resemble the paid-by-milestone model or a short-term, lump sum amount upfront.

Loan Highlights

  • Construction loans can cover development, construction, and renovation of real estate. 
  • Construction-only loans mature at the end of the project. 
  • Construction-to-permanent loans become long-term loans after construction is complete. 
  • Most construction loans pay out based on agreed-upon milestones.

Benefits

  • Borrowers are only responsible for repaying the funds approved on milestones. 
  • Some construction loans require only interest payments until project completion. 
  • Financing can cover any stage of construction, even if the project has already begun. 
  • A business can leverage another property in its portfolio to secure the loan for better rates. 

Challenges

  • If construction is stopped, no new funding will be released. 
  • If no property is in place for collateral, the borrower must rely on their credit history. 
  • Detailed construction plans must be submitted. 
  • If a contractor is not approved by the lender, the business may have to hire another construction company.