You need to understand commercial construction loan rates if you build from scratch or renovate commercial properties.
This will help you choose the best lending product to take your small business to the next level.
In this article, we discuss interest rates, requirements, types of loans, and the best lenders.
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What Is A Commercial Construction Loan?
A commercial construction loan is a lending product used to build, remodel or improve commercial buildings.
With the funds from this loan, you can renovate spaces, build buildings or buy land to start a commercial project. You can also cover all costs and pay for materials and labor.
Construction companies or other business owners seeking financing use these loans during whatever construction phase they're in.
How Do Construction Loans Work?
Construction loans are typically short-term business loans
used to pay for the costs of a building. They are generally for:
Construction loans are typically paid out in installments as the building progresses. Some construction loans offer interest-only payments.
- business owners with construction businesses
- business owners that are planning to build their offices or stores
Interest-only payments mean that while the construction is underway, you only pay for the interest. That changes when the construction is complete; then, you start paying back the principal.
Most construction loans require a down payment of 10% to 30% of the project's total.
After the building process is complete, some loans will convert either into a fixed-rate or adjustable-rate mortgage.
Commercial Construction Loan Rates
Current commercial construction loan rates will vary depending on the lender, type of loan, and market conditions. They can vary between 4.5% to 75%.
When comparing loans, consider that some lenders may also require a higher down payment for a construction loan than a traditional mortgage
. There will also be closing costs you'll need to cover.
Most lenders charge a higher interest rate for a construction loan than a traditional mortgage. This is because lenders consider construction loans to be higher risk.
Current commercial construction loan rates may also vary depending on the type of project you are planning to build
For example, a lender may charge a higher interest rate for a hotel than a small shop. This is because hotels are more expensive and complex to build than other commercial buildings.
Use our business loan calculator to simulate different loan terms.
Types Of Construction Loans
There are 6 main types of construction loans. Each one has its own advantages, so you'll need to decide which is best for you and your project.
With a construction-to-permanent loan, you'll borrow money to pay for the construction costs of your business. Once the construction is complete, your loan will convert into a permanent mortgage.
This is easier than getting two separate loans.
This loan is ideal if you'll build and own the property.
A construction-only loan is precisely what it sounds like. You'll use the loan to finance construction. There's no permanent mortgage involved like with a construction-to-permanent loan.
This is the best option for construction businesses that won't own the property.
A renovation loan is a type of loan that allows you to finance the costs of renovations or repairs to an existing building
. This can be a good option to update an older business or make repairs.
The biggest advantage of a renovation loan is that you can use it to finance a wide variety of projects. For example, from simple cosmetic updates to major structural repairs.
A bridge loan
is a type of loan that you can use to finance the purchase of a new business before you sell your current one
. This can be helpful if you need to move quickly and don't have the time to wait for your existing building to sell.
Bridge loans are typically short-term loans with high-interest rates. They're not ideal for everyone, but they can be a practical option in certain situations.
Owner-Builder Construction Loan
An owner-builder construction loan is a type of loan specifically for people planning on owning the building but also constructing it themselves
. If you qualify for this type of loan, you'll be able to finance the cost of materials and labor.
Owner-builder construction loans can be a good option if you have construction experience and knowledge.
This is the best alternative for construction businesses wanting to build their own offices.
An end loan is a type of loan used to finance the purchase of a building or office that's already built
. This can be helpful if you don't want to go through the hassle of building it yourself.
End loans are typically shorter-term loans with higher interest rates. They're not ideal for everyone, but they can be a helpful option in certain situations.
If approved, sign the loan agreement and receive the cash directly into your bank account.
A land loan is a loan that you can use to finance the purchase of raw land
. This type of loan is typically for:
- business owners
- investors to secure funding for the development of buildings, malls, etc.
Best 4 Loans
Here are some of the market's best commercial construction financing options.
are some of the most versatile lending products out there. Depending on the lender, you can use them for a variety of things, including construction.
Whether you need funds for your construction company or want to build offices for your business, these could be the best alternative.
Camino Financial is an online lender that has helped many small business owners obtain the funding they need to grow.
Our microloans have helped businesses in a variety of industries, including construction. We are proud to have helped many entrepreneurs realize their dreams of building a successful business.
We understand that running a small business is not always easy. That's why we offer flexible loan terms and competitive rates to help you get the funding you need when you need it.
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- Amount: $5,100 to $25,000
- Repayment terms: 24 months
SBA CDC/504 Loan Program
The SBA offers financing through Certified Development Companies (or CDC), banks, and credit unions.
The SBA guarantees 40% of the financing, the bank ensures another 50%, and the borrower must provide the remaining 10%.
You can apply for a maximum of $5 million.
The term can be from ten to twenty years. They have fixed interest rates based on those established by United States Treasury.
Costs include additional costs, such as service fees.
The CDC/504 Loan program ensures benefits such as 90% project financing and more extensive loan repayments.
You need to make an initial payment of between 10% and 30% and pledge a guarantee.
You need to have a Social Security number (SSN).
SBA 7(a) Loan Program
This one is the most popular SBA loan.
You can access up to $5 million, and the repayment terms can range from 10 to 25 years.
The interest rates are between 7.75% and 10.25%, depending on the amount you apply for.
Usually, you have to make a down payment of 10% or 20% of the loan and offer collateral. The lender can approve the 7(a) loan within two to three months.
You need a Social Security number to apply.
Commercial Real Estate Loans
If you're planning on using the loan to purchase property for your construction business, a real estate loan can be a good option. They often have lower interest rates than other types of loans, and you can use the property as collateral.
These loans can be up to $5 million and have repayment terms of 5 to 10 years (sometimes more).
Top 5 Lenders
Now that you've decided to get a loan, it's time to learn about some available loan options.
For years we have been a reliable alternative for hundreds of business owners seeking support and financing.
Our goal is to provide the funds business owners need to succeed. When you complete our application, you'll know instantly if you prequalify!
While our lending products are not specifically for construction, you can use them for such purposes.
We offer some business loan options between $5,100 to $25,000, and our requirements are easy to meet.
Do you need more capital? Don't worry. We have other lending products that can offer up to $400,000.
We have fixed interest rates, so you won't receive any surprises when paying your loan. We also offer monthly payments for your convenience.
We have minimum requirements:
- Your business must've been active and registered for 12 months
- Make $30,000 annually
- You can apply with an ITIN if you don't have an SSN
- We can approve applicants with no previous credit history
With us, you'll be like with family.
From the moment you apply to funding, the lending process can take between 2 to 10 days to receive your funds.
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Small Business Administration
The Small Business Administration (SBA) is a United States government agency that supports small businesses and entrepreneurs. The SBA offers a variety of loan programs to help small businesses start and grow.
The SBA also offers counseling, training, and other resources to help small businesses succeed.
If you are considering starting a small business or already have a small business, the SBA can help you get the financing you need to grow your business.
Their maximum loan amount if of $5 million.
Because their loans are government-backed, they can offer a low-interest rate.
The downside is that requirements are not very lenient. For example, they have a credit score requirement of 640+, and you need an SSN.
They offer different lending products.
Wall Street Funding
Their commercial construction loans work like cash advances secured by outstanding accounts receivable. This is a benefit for businesses looking for quick financing. The funds can range from $3,000 to $500,000.
As for the construction loan rates it offers, they have interests between 7.9% and 45%. They disclose other terms once the loan is in the pre-approval process.
If approved, you will receive the funds in 3 days and can use them for any purpose.
This lender does not charge upfront fees or compound interest.
Wall Street Funding offers loans to different industries. They specialize in small and medium-sized companies with low credit scores.
You need an SSN to apply.
With more than a decade in the market, this lender relies on technology and data science to offer financing options to small businesses.
BFS Capital has short-term commercial loans
and cash advances, starting at $5,000 and up to $750,000
. They don't charge processing fees but a fixed fee according to the loan size.
While they are not upfront about how much they charge, BFS Capital uses factor rates instead of interest rates (just like MCAs). For a loan of 12 months, they range from 1.20 to 1.35.
Although many details are only specified after approval, the terms can range from 6 to 18 months. You pay BFS Capital loans weekly or daily; they don't offer monthly payments.
Monthly payments are better than weekly or daily ones.
To apply for a commercial construction loan, your business must have been operating for more than two years and earn at least $12,000 monthly. You can receive the funds in two business days.
A requirement to apply is to have an SSN.
How To Choose The Best Construction Loan
When it comes to business loans, there are many factors to consider.
The first step is to understand the different types of business loans available.
The next step is to consider the purpose of the loan. Is it for financing a new construction project? Is it to build or remodel an office or shop? The type of loan you choose will depend on your business needs.
Once you've selected a loan type, you must compare the interest rates and repayment terms offered by different lenders.
It's also a good idea to read the fine print to understand the fees and charges associated with the loan (for example, pre-payment penalties).
Also, compare down payments. Construction-specific loans will ask for down payments, while more traditional business loans won't. Don't forget about closing costs.
When choosing a business loan, shopping around and comparing the offers from different lenders is crucial. You can get the best deal possible for your business by doing your homework.
Commercial Construction Loan Requirements
These are the documents that traditional or online lenders commonly require:
- A business plan
- The projections with the profits of your business
- Personal and company financial documents
- The estimated value of the entire project, plans, designs, and all its technical specifications
Other requirements are as follows:
- 660+ credit score
- 10% to 30% down payment
- Stable income (up to $100,000 in annual profits)
- 2+ years in business
- Good debt-to-income ratio
- Experience in the construction field
How To Get A Construction Loan: 7 Steps To Applying
Start An Application
- Create a budget, so you know exactly how much capital you need. Having a business plan with financial projections could help you.
- Research the best business loan options for your needs. Consider both online and traditional lenders, as well as government-backed loans.
- Compare interest rates and APRs, repayment terms, fees, closing costs, and other important factors.
- Choose the lender that offers the best loan terms. Make sure you meet the minimum credit score requirement. If so, start an application.
- Complete the application process. Share personal and business financial documents. For example, tax returns, bank statements, and asset information. Others will ask you to use safe apps like Plaid for bank verification.
- Wait for approval. Depending on the lender, this process can take a couple of days to several weeks.
Alternatives To Construction Business Loans
There are a few different types of loans that can be useful for funding a construction business or commercial construction.
Each has its own advantages and disadvantages, so it's important to carefully consider which type of loan is right for your business.
They can be a quick and easy way to get funding for your construction business. However, they can also be costly, with high-interest rates and fees. They might not be a great idea for significant expenses, though.
You'll likely be able to get a lower interest rate with a traditional mortgage than with other loans. However, you'll need to have good credit to qualify, and you'll need to put up your home or other property as collateral.
Construction equipment loans.
If you need to purchase construction machinery, equipment financing loans
are for you. They often have low-interest rates and flexible repayment terms.
Lines of credit.
This type of loan gives you access to a set amount of funds you can draw on as needed. They can be a good option for construction businesses since you only pay interest on the amount you borrow.
Some people apply for personal loans. But you shouldn't use a personal loan for business purposes.
Grow Your Business With A Commercial Loan
If you are ready to start a commercial construction project, you should apply for a commercial construction loan. With the capital, you can buy land, pay for its conditioning, acquire materials, and pay for labor.
At Camino Financial, we don't leave any businesses behind. We can give you the funds you need to develop your renovation or construction project
We don't have collateral or down payment requirements.
We offer a fixed rate and an easy application.
Our privacy and security policies keep your information safe during the whole loan process.
Are there higher qualification requirements for construction loans?
Construction loans usually have higher qualification requirements because they are riskier.
Lenders often require a higher business credit score, down payment, and income for construction loans. They may also need a down payment or collateral, such as the value of the land you are building on.
What does a construction loan cover?
These loans usually cover most costs associated with construction.
On the other hand, they don't usually cover furnishings.
- Building materials
Do construction loans cover the design phase?
No, construction loans do not typically cover the design phase. This is because the design phase can vary significantly in cost and time, making it difficult to estimate the loan amount needed.
If you are working with an architect or designer, you may be able to include their fees in your construction loan request.
What are the requirements for a commercial construction loan?
Usually, you can expect the following minimum requirements:
Other lending products, like Camino Financial microloans, have lower requirements and an easier application process.
- A detailed business plan
- Financial documents
- Minimum credit score and years in business
- A down payment
- Good debt-to-income ratio
How to get a construction loan?
To complete a loan application process, you'll need to select and approach a lender.
Be prepared to provide detailed information about your business and the construction project.
To assess your creditworthiness, the lender will also want to see:
If you receive approval, you'll typically need to make a down payment. And you'll likely pay a higher interest rate than you would on a standard business loan.
- financial statements
- tax returns
- other documentation
How much do you have to put down on a construction loan?
This depends on the lender and the project you want to finance, but expect to have to pay from 10% to 30%.
What is the current interest rate for commercial mortgages?
In 2022, the current interest rate for a commercial mortgage loan varies depending on the lending institution and the type of mortgage. However, rates typically fall between 4% and 17%.