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Education

What is a Commercial Construction Loan?
Education

What is a Commercial Construction Loan?

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For a business owner, getting the perfect building for your business might require building it yourself. That’s where commercial construction loans come in: they allow you to buy a lot and build a space to suit, without having to front the capital for it all at once. Whether the land is empty, or it already contains a building that needs to be torn down or renovated, commercial construction loans provide the funds for a business to invest in commercial property and, by extension, their business.

Learn more about how commercial construction loans work and whether they’re the right next step for your business.

Commercial real estate loans vs. construction loans

Just as people use loans to buy a private home as a residence, businesses use loans to buy land or property for their business, via commercial real estate loans. These loans typically have longer terms and can be tailored to the business’ needs and requirements. Commercial real estate loan rates are quite variable, but generally range between 3% and 12%. Terms for commercial real estate loans vary as well, but tend to be longer, such as 25 or 30 years.

Commercial construction loans

However, when a business needs to construct a new space, rather than take over an existing one, a commercial construction loan makes the most sense. These loans allow a business to acquire land and fund the construction of a new building while making interest-only payments until the build is complete. Commercial construction loan rates are typically in the 5% to 10% range, but with much shorter terms: usually 12 months to 36 months, long enough for the building to be completed.

At that point, the construction loan may be converted to a permanent loan, which can alter the interest rate and extend the repayment term.

Benefits of a commercial construction loan

Commercial construction loans allow business owners to build or renovate a space that suits their business and allows for expansion. Instead of being prohibitively expensive, commercial construction loans bring the costs within the realm of possibility, opening the door to future growth while controlling cash flow in the present.

With a commercial construction loan (much like with a personal construction loan) the borrower doesn’t receive the loan as a lump sum. Rather, the lender releases funds to the builder or contractor at predetermined milestones for the construction and completion of the project.

For this reason, it’s vital that the business owner work with a reputable builder to keep costs under control and the project humming along according to schedule. An upside to this system is that the borrower needs to pay interest only on the amount borrowed so far.

Once the build is complete, the borrower can use the property as collateral on a commercial real estate loan.

Where to find the best commercial construction loans

When shopping for a commercial construction loan, friendly terms and a good interest rate are going to be very important factors, because they’re going to have an effect on your business’ bottom line. You’ll want to run the numbers to be sure your business can sustain the payments during construction as well as be certain you’ll be able to support a commercial real estate mortgage going forward. If this all seems overwhelming, don’t worry—an experienced Consumers Bank Business Banker will walk you through every step of the process.

What you may not have considered are other factors that will affect the quality of your loan: the speed at which it is processed, and the service you receive during the application, underwriting, and service portions of the loan.

At Consumers National Bank, we pride ourselves on all facets of commercial loan servicing, from our speedy in-house processors to our friendly loan originators and customer service team. As an Ohio company (we’re headquartered in Minerva) we know the local commercial real estate market inside and out and can provide stellar personalized service every step of the way.

Contact us to find out more about our commercial loan offerings, and discover whether a commercial construction loan is the answer to your business’ future growth.

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