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Securing a business construction loan may seem like an intimidating task at first, but it doesn’t have to be. Knowing what qualifications are needed to secure a loan can help make the process smoother and save you time.
From credit scores to affordability, there are a few key things lenders will look at when deciding whether or not to approve you for a loan. Continue reading to find out what to expect at each stage of securing business loans for building projects.
What Is a Construction Loan?
A commercial construction loan is a type of loan specifically tailored to help building companies and independent contractors finance the costs associated with various real estate projects. With a construction loan, funds are disbursed to cover expenses, including construction materials, labor costs, permitting fees, and more. Many businesses will also use a commercial construction loan to finance equipment, balance their cash flow, or invest in new revenue-driving opportunities.How Do Construction Loans Work?
In order to secure business loans for building projects, it’s important to understand how they work in the first place. Construction loans and building loans come in a variety of shapes and forms. For starters, they can be short-term or long-term.Short-term business loans for building projects
Short-term building loans are generally used for developing real estate projects and mitigating temporary cash flow disruptions, but they’re also useful for other purposes, like funding the cost of materials to start a new project. These loans typically feature repayments due within 1 to 3 years, although it can be extended in some cases. Some short-term loans might require a balloon payment at the end of the term, where the principal and all accrued interest are due at once, while others may have regular monthly payments.Long-term business loans for building projects
Long-term building loans can be used to finance entire properties, land, or equipment. They can range from 5 to 25 years. Long-term building loans may require a down payment from borrowers, which is typically around 20% of the total loan amount. In some cases, the lender may also require additional collateral or personal guarantees in order to secure the loan, such as:- Real estate properties
- Inventory
- Machinery or equipment
- Personal assets, such as vehicles
- Accounts receivable
How to Qualify for a Business Construction Loan
Simply put, securing business loans for building projects typically requires the borrower to demonstrate that they have the financial resources and creditworthiness to complete a project successfully and pay back the loan. A lender will typically look at several factors when assessing your qualifications. Let’s take a look at some of the key steps to qualify for a construction loan:Credit History
Your credit score is one of the most important factors in getting approved for a business construction loan. Lenders will review your credit history to determine your creditworthiness and how likely you are to repay your loan on time. A higher credit score will not only improve your approval odds but can also help you qualify for better interest rates, resulting in significant savings over time. You’ll have the best chances of qualifying for a business loan for building projects if your credit score is at least 650 or higher. However, if your score is less than favorable, you may still qualify for funding solutions. In this case, online lenders would be your best bet because they tend to consider a broader range of factors when assessing an application. Here are a few quick tips if you are looking to improve your credit score:- Set reminders, or put automations in place to avoid late payments
- Pay down your existing debt before applying for a business loan
- Regularly check your credit report from bureaus like Experian
- Keep your Debt-to-Income ratio below 30%
- Limit the number of hard inquiries before applying
- Avoid opening multiple new accounts in a short period of time
Down Payment
In addition to having a strong credit score, applicants may also be asked to provide sufficient collateral or a down payment to secure a business loan for their building project. As we mentioned earlier, collateral is typically in the form of property or assets, and it gives the lender some security in case the borrower defaults on the loan. Down payments and collateral are almost always required if you’re looking to purchase existing real estate, land, equipment, or other large assets. Oftentimes, the assets you’re looking to finance will count toward collateral requirements. This way, you can invest in your business without sacrificing your personal finances. The exact down payment required by the lender may vary between the type of the loan and your financial situation, but the most common one is 20%.Financial Documents
As a business owner, you should be able to demonstrate that you have the funds or profitability to cover the costs associated with repaying your loan. Lenders may ask you to provide evidence of your business’s existing financial resources, such as cash reserves or other liquid assets. Typically, you can confirm your financial standing through your business’s financial records. Before applying for a business loan for a building project, be prepared to show the following:- Bank statements from the last 6 months
- Tax returns for the last 2-3 years
- Collateral documentation
- Business records
- Cash flow projections
- Balance sheet
- Income statement
- Cash flow statement