Commercial Construction Loan Do’s and Don’ts
December 2, 2024
Before you can break ground on a new commercial construction project, securing the right financing is essential for success. Whether your company is building a new facility from the ground up or simply expanding on existing real estate, you need reliable funding options that work with your construction timeline and budgetary needs.
One of the biggest challenges for businesses needing a commercial construction loan is avoiding some of the financial pitfalls and unfavorable loan terms that can hamper a project’s progress.
Discover the different types of construction loans available, some of the critical do’s and don’ts for business owners in need of loan options, and how Texas Gulf Bank can help guide you through the loan process.
What is a Commercial Construction Loan?
Commercial construction loans are specifically designed to provide businesses with the capital needed to build or renovate commercial properties. These are short-term loans intended to cover the majority of construction costs related to commercial construction, such as labor, materials, permits, and the land itself.
Unlike conventional small business loans, construction loans are disbursed in stages (also known as draws) that are based on reaching specific construction milestones – instead of being paid as a lump sum. Borrowers typically only pay interest on the loan funds as they are drawn, which can reduce the financial burden to companies while construction is ongoing.
However, not all construction loans are created equal. Choosing the wrong one may cause your business to experience cash flow issues or take on unnecessary expenses. It’s important to have a lending partner like Texas Gulf Bank on your side that offers both the expertise and strategic loan options needed to attain a successful construction process.
Types of Commercial Construction Loans
You know your business needs construction financing before construction or renovations can begin, but which lending option is best for you? Examine the different loan options available to business owners and how these construction loans work.
1. SBA Loans
The Small Business Administration (SBA) is a federal agency dedicated to encouraging small business growth by making financing options more accessible, especially for growing companies and established businesses.
Their primary way of supporting businesses is by partnering with banks, such as Texas Gulf Bank, to provide an SBA loan guarantee on a portion of the loan amount to eligible small business owners.
The SBA 504 and SBA 7(a) programs are popular financing options for small businesses that need to retain financial flexibility during long-term construction projects.
- The SBA 504 loan can be used to finance commercial properties.
- The SBA 7(a) loan can cover both construction and working capital needs.
While SBA loans are ideal for small businesses in Texas, these loans may come with more stringent qualification criteria and can take longer to be approved and funded. Our dedicated SBA loan specialist can help you determine whether this is the right option for your business.
2. Construction to Mini-Permanent Loans
Construction to mini-permanent* mortgage loans, also known as “construction-to-mini-perm” loans, offer flexibility by covering the majority of construction costs and later converting from a construction loan to a traditional mortgage once the building is complete. This setup eliminates the need to refinance or obtain a second loan, streamlining the total financing process.
During the construction phase, borrowers only pay interest on the drawn funds. Once construction is complete, the loan converts to a mini-perm mortgage with fixed repayment terms.
If your business wants to avoid the expense and delays of applying for another loan after construction, then a construction to mini-permanent loan may be the optimal loan program for your business.
*NOTE: Some creditors may offer one-time-close construction loans that include a permanent mortgage, but Texas Gulf Bank’s one-time close construction loans only include a mini-permanent mortgage.
3. Short-Term Construction Loans
Short-term construction loans are ideal for projects that can be completed within a short time, typically 12 to 18 months.
These loans are typically interest-only, meaning you only pay interest during the construction period and repay the principal once the project is complete. If your project has a short timeline and you can repay the loan quickly, then a short-term construction loan may be the best choice for your business financing needs.
Find the Right Lending Option With Our Support
One of the most important construction “do’s” is to work with a lender who can help identify the ideal lending solution that fits your business needs and construction project.
At Texas Gulf Bank, we understand that every business construction project is different, so we offer a range of loan options to meet your specific needs and goals, including SBA loans, construction to mini-permanent loans, and short-term construction loans.
Once we identify which loan program is best for you, we can guide you through each step of the loan application process.
The Do’s and Don’ts of Business Construction Loans
Choosing the right business loan for your commercial construction needs is a key first step, but there are other factors to consider if you want your project to be a success.
– Do Work with Reputable Lenders: At Texas Gulf Bank, we have over 110 years of experience lending to businesses across the Southeast Texas Gulf Coast. In addition to a strong track record and regional insight, we offer a range of strategic financing options, including construction lending.
– Do Plan for Contingencies: Construction projects may experience delays or unexpected costs. The ideal construction loan should offer some financial wiggle room in case things don’t go according to plan.
– Do Compare Loan Terms: Instead of focusing solely on interest rates, you will want to compare repayment terms, loan fees, and funding flexibility to ensure the right fit.
Every part of your upcoming construction project should be carefully reviewed – including your initial construction timelines, the financing options available, and the loan application process. Otherwise, you could rush into a financial decision that ends up costing more than anticipated.
– Don’t Start Construction Before Securing a Bank Loan: Getting your commercial construction underway prior to securing a bank loan may expose you to substantial financial risk.
– Don’t Underestimate Costs: Construction projects can be unpredictable because of weather, labor, or fluctuations in material costs. Consider adding a buffer for cost overruns.
– Don’t Rush the Loan Application Process: Securing the right loan takes time. Rushing through the loan process may result in a loan structure that doesn’t align with your project’s timeline.
Enjoy a Better Lending Experience with Texas Gulf Bank
Choosing the right loan for your commercial construction project is a critical decision that can impact your business’s long-term financial health. Whether you’re considering SBA loans or short-term construction loans, you will want to evaluate your project timeline, budget, and cash flow needs. Texas Gulf Bank can help.
At Texas Gulf Bank, we provide an efficient, streamlined loan process that allows you to focus on your construction project. We also aim to provide peace of mind that your financing is secure and in place for all your construction needs.
Starting a commercial construction project can be an overwhelming task, but securing your financing for construction shouldn’t be. That’s why we offer a streamlined loan application process to make the process go smoothly.
Our process begins with an initial consultation to discuss your construction needs, business goals, and financial history. Applicants interested in a commercial construction loan with Texas Gulf Bank will need to provide documentation including, but not limited to, the following:
- Completed loan application
- Three years of tax returns for the business and all guarantors
- Three years of business balance sheets and income statements
- Current business financial statements
- Business debt schedules
- A personal financial statement from all guarantors
- Construction specs and timeline
- Detailed plans for the use of the property
Once the initial loan assessment is complete and loan documentation is submitted, we will provide you with a prompt response. As a local bank, our lending decisions are made in-house, enabling us to typically offer our customers expedited decisions on loans.
Find The Ideal Commercial Construction Loan Partner in Texas
For your commercial construction project to get off the ground, you need a lending partner who understands your business needs.
When you choose Texas Gulf Bank, you gain a banking partner with a wide range of commercial construction loan options, an experienced team of loan officers ready to help, and a commitment to helping your business thrive.
Contact us today to learn more about how we can support your next construction project with the right financing solutions.
All loans subject to credit approval