What Is a Commercial Construction Line of Credit?

No matter how well you’ve planned them, construction projects often come with a lot of unexpected challenges – from fluctuating material costs to labor shortages, supply chain issues, unexpected delays, and maintaining liquidity throughout the building stages.

Dealing with unforeseen expenses is a common theme for any construction project, especially if it’s bigger or of higher complexity. When this happens, having quick access to funds can be a game-changer to avoid potential delays or disruptions.

This is where a commercial construction line of credit comes into play – by allowing you to tap into funds on an as-needed basis, you can handle challenges as they come, and not worry about disruptions related to the lack of cash flow.

What Is a Commercial Construction Line of Credit? 

A commercial construction line of credit is essentially a business line of credit designed to cover the needs of contractors and construction companies during the development of their projects.

It’s a flexible financing tool that saves you time and cuts unnecessary costs that would otherwise incur if you had to apply for multiple loans throughout the project. Some of the main characteristics of a commercial construction line of credit include:

Revolving Nature 

This type of financing is revolving in nature, which means that it allows for repeated borrowing and repayment up to a limit specified by the lender.  This makes it different from traditional loans where you only get access to a specific sum once during the application process, and you can’t borrow again.

Once the funds are repaid, they become available for use again. This gives you greater flexibility compared to other types of financing.

Credit Limit

Another key characteristic of a commercial construction line of credit is that it has a credit limit, which is pre-approved based on your creditworthiness, the scope of your project, and your overall financial health as a business.

It can range from hundreds of thousands to millions of dollars. Read more on how to get a $500k business line of credit. 

Flexible Draws

When it comes to applying for a commercial construction line of credit, another component that you will have to keep in mind is that it works on a draw basis. In other words, you can draw funds as needed during the construction phase to cover project expenses.

This draw period typically aligns with the project’s timeline, lasting from several months to a few years.

Interest Payments

Another must-know characteristic of construction lines of credit is that interest is only charged on the funds actually drawn, not the entire credit limit. For example, if your credit limit is $500,000 but you only draw $100,000, you will only pay interest on the $100,000.

By only paying interest on the drawn amount, your initial interest payments are lower. This can be particularly beneficial in the early stages of a project when cash flow might be tighter.

As your project progresses and your funding needs change, your interest costs will adjust accordingly. If you draw more funds, your interest payments will increase, and if you repay some of the principal, your interest costs will decrease.

Repayment Terms

The repayment terms of a commercial construction line of credit typically vary. Some lines of credit require interest-only payments during the draw period, with full repayment due at the project’s completion. Others may have more regular repayment schedules.

What Is an Example of Taking Out a Commercial Construction Line of Credit? 

To better understand how a commercial construction line of credit works, let’s take a look at a more practical example. Let’s say that you are undertaking a construction project with an approved line of credit of $500,000.

Your draw schedule may look something like this:

• Initial Draw – You take out an initial draw of $100,000 to cover the materials and permits you need in order to begin the project. Interest will be charged on the $100,000, not on the entire credit limit of $500,000.
• Subsequent Draw – Once the project has advanced, you decide to take out an additional draw of $50,000 to purchase further materials, and pay for labor costs. Now, the interest is charged on the total of $150,000 drawn so far.
• Partial Repayment – You decide to repay $50,000 of the principal as the project progresses, and you have started generating some revenue from sales. Interest is now charged on the remaining $100,000 balance.
• Project Completion – You draw $100,000 more to cover the final costs of the project, which means that you now have a cumulative balance of $200,000 that is subject to interest.

After project completion, you start repaying the principal along with the interest on the $200,000 total drawn amount.

How Can I Qualify for a Commercial Construction Line of Credit? 

The key qualification criteria for a commercial construction line of credit may vary by lender. However, this is what you should be prepared for in most cases:

• Demonstrate Good Financial Health – Demonstrate that your business is in good financial health by providing strong financial statements, including balance sheets and income statements. Aim for a DTI of less than 43% and a credit score of +680.
• Show That Your Project is Viable – There is a lot of risk when it comes to construction projects, which is why you should be able to prove project viability. This includes a detailed project plan, cost estimates, and a proven track record of successfully completed projects.
• Be Prepared to Provide Collateral – Offering collateral such as real estate, equipment, or other valuable assets can improve your chances of approval. The value and acceptability of the collateral will be assessed by the lender.
• Ensure Legal and Regulatory Compliance – Make sure that all necessary permits and licenses for the construction project are in place. A history of regulatory compliance and no significant legal issues can positively influence your application.
• Prepare Your Business Documentation – In order to qualify for a commercial construction line of credit, you should present business documentation, including a well-structured business plan, tax returns, and adequate insurance coverage.

What Is the Maximum Amount of a Commercial Construction Line Of Credit?

The maximum amount of a commercial construction line of credit varies widely depending on the lender, your creditworthiness as a borrower, and the financial health of your business. Typically, credit limits can range from $10,000 to several million dollars. 

For larger amounts, factors such as the business’s revenue, collateral offered, and the project’s scope are critical. Lenders assess these aspects to determine the appropriate credit limit, ensuring it aligns with your capacity to repay.

Qualifying For a Line Of Credit With NBC

If you want to qualify for a commercial construction line of credit, look no further than National Business Capital. With $2+ billion financed since 2007, multiple awards, and an experienced team of Business Finance Advisors, we have everything you need to find the best financing options for your project.

Are you ready to get started? Apply here.