Confused About Commercial Construction Loans? What To Expect When Applying

Posted on: 30 August 2018

Building a commercial building today requires a major investment of both time and money. Depending on the size of the project and any complicating factors that are involved, the planning stages can take months or even years before the first shovel full of dirt is moved at the site. With permits to obtain, site studies to order, plans to develop, and hundreds of requirements, the preparations can seem overwhelming. 

One of these preparations is finding a way to pay for the project, and for most investors and builders, a commercial construction loan from a place like LCNB National Bank is the most often selected option. If you are new to the commercial construction lending process and feeling a bit confused, here are some things to expect when you apply for a construction loan. 

Expect to pay a large down payment requirement

Commercial lending for the purpose of construction is very different from the residential home mortgage process. For example, it is possible to find home loans that require little or nothing down, but this is rarely possible when applying for a commercial construction loan. 

Instead, most commercial construction lenders require a minimum down payment of at least 25 to 30 percent of the total loan amount, even with a good credit score. If your credit is blemished or other risk factors exist, you can expect to have to put a much higher percentage down in order to be considered for the loan. 

Expect a short repayment period

Those who are new to commercial lending should also know up front that the repayment term is relatively short. Instead of the 15- to 30-year repayment term commonly found on home mortgages, commercial loans may have only a 3- to 7-year repayment term. In addition, the average interest rate for a commercial loan will be much higher and most are written as adjustable rate loans.

Expect to need a solid business plan

Since commercial loans amounts are typically much higher than the average residential home loan, commercial lenders will want to take every precaution to protect their investment. In addition to verifying your financial records and collecting a large down payment, commercial lenders will also require the submission of a solid business plan. 

A business plan capable of helping you successfully obtain the commercial lending services that you need will need to make your case in a positive manner and provide the following documentation: 

  • an itemized list of assets and liabilities 
  • a pro forma statement which carefully projects future earnings and expenses
  • a business resume that showcases your company and the products and services you provide
  • the actual business plan, including an executive summary and detailed information regarding your future plans and goals

If you do not yet own a business and are applying for a commercial loan in order to start one, you will need to replace the business resume with a personal one that illustrates your past accomplishments, education, and any community leadership projects you have been involved in. 

Expect several loan conditions 

There can be a variety of special loan conditions and requirements on commercial loans. Some of the most common ones include: 

  • a minimum loan amount 
  • prepayment penalties 
  • lengthy closing times

In addition, most commercial loans require reserve funds to be in place when the application is made. These funds are generally required to be equal or greater than six months of payments on the mortgage for which you are applying for. These funds usually must be kept in liquid form in a lender-approved account. Most lenders will also require the funds to be kept in place, untouched by the borrower, for a certain period of time. 

To learn more about what to expect when applying for a commercial construction loan, spend some time discussing your situation with a reputable commercial construction lender in your area. 


Money Management Tips for Parents

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