What Are The Key Requirements for Commercial Construction Loans?

Undertaking a new construction project is always an exciting endeavor and an important step in taking your business to the next level, but finding the right financing option and meeting all the requirements can often be a challenge.

As a leader in commercial construction loan financing, National Business Capital is well aware of the challenges and uncertainties that come with initiating new projects and getting funding for them. 

For this reason, we have come up with a comprehensive guide to help you navigate the key requirements for commercial construction loans. So, let’s get right into it:

8 Key Requirements For Commercial Construction Loans

Understanding the requirements for commercial construction loans accelerates your search for the right lender. Here’s our step-by-step guide to commercial construction loan requirements.

1. Maintain a personal and business credit score

When it comes to the main requirements for commercial construction loans, one of the most important ones is to maintain a high personal and business credit score. A strong credit score signals to lenders that you have a history of managing credit responsibly.

It also indicates that you make your payments on time, are able to manage debt effectively, and pose a lower risk as a borrower when it comes to loan default. In addition, having a high score shows reliability and predictability in financial dealings, which is highly valued considering the uncertain realm of construction financing. 

Your credit score will impact your:

• Loan eligibility – failing below the lenders’ threshold may result in loan rejection
• Loan terms – A higher credit score can give you more favorable loan terms
• Interest rates – It can also help you qualify for lower interest rates and higher limits

What is the minimum business credit score for construction loans?

Business credit scores are measured on a different scale than personal ones, and they are typically based on the Dun & Bradstreet PAYDEX scale. For commercial construction loans, aim for a score of 75 or higher (out of 100).

What is the minimum personal credit score for construction loans? 

If you are applying for a commercial construction loan, your personal credit score as a business owner also matters. Most lenders prefer a minimum personal credit score of around 680 to 700.

To maintain a good credit score, make sure to:

• Pay the bills of your business on time
• Ensure prompt payments to suppliers and creditors
• Monitor your credit reports from bureaus like Dun & Bradstreet and Experian
• Develop relationships with suppliers and vendors that offer credit terms
• Keep your credit utilization ratio low, ideally under 30%
• Keep your debt at manageable levels 
• Limit new credit inquiries before applying for the loan
• Diversify your business credit portfolio 
• Maintain healthy cash flow and strong financials
• Establish a good business credit history

Having a high credit score is among the most important requirements for commercial construction loans, so start working towards it as soon as possible before applying for a loan. 

2. Provide a substantial down payment

As we explained in our previous article, How to Qualify for a Construction Loan: 5 Expert Tips, commercial construction loans are typically considered riskier than traditional mortgages. 

That’s because they come with various uncertainties, including potential construction delays and cost overruns, as well as potential changes in market conditions during the construction phase. 

In addition, the lack of tenants or buyers lined up in advance makes them more speculative in nature, further increasing risk.

For this reason, providing a substantial down payment is one of the main requirements for commercial construction loans, usually higher than that for standard commercial loans.

What down payment is required for commercial construction loans?

Commercial construction loans typically require a down payment ranging from 20% to 30% of the total project cost. However, this can vary based on the project’s risk, the borrower’s creditworthiness, and the lender’s policies.

In some cases, especially for higher-risk projects, the required down payment may be greater.

Does the down payment percentage vary by project type?

Yes, the down payment percentage for commercial construction loans can vary by project type. Factors like project risk, market demand, and historical performance of similar projects influence the required down payment.

For instance, a high-demand retail development might require a lower down payment than a specialized industrial facility due to perceived risk differences.

How does the credit score impact my down payment for a commercial construction loan?

A higher credit score can lead to a lower down payment (around 20%) for a commercial construction loan, as it indicates a lower risk to lenders. Conversely, a lower score may result in a higher down payment requirement (30%).

3. Prepare a comprehensive project plan 

When it comes to commercial construction loans requirements, another important factor that we need to mention is the preparation of a comprehensive project plan. A good project plan should include:

• Scope of the project, clearly outlined when it comes to objectives, size and type
• Feasibility study to assess market demand, financial viability and potential risks 
• Realistic timeline for the project, from key milestones to construction phases
• Risk management plan to identify potential risks and how you plan to mitigate them
• Budget and financial projections covering costs and revenue projections
• Appraisals and market analysis to support the feasibility of the project 
• Loan repayment plan to show lenders how you plan to repay the loan 
• Legal and regulatory compliance, including zoning laws and building codes 
• An outlined exit strategy, such as selling, leasing, or refinancing the property

In addition, make sure to identify the project team, including the architects, engineers, and contractors that you are planning to work with, as well as their qualifications and past project experience.

Working with a highly seasoned and experienced team will increase the credibility and trustworthiness of your construction project, making it more likely to get an approval from the lender.

4. Detail a realistic budget

Next on our list of commercial construction loan requirements is detailing a realistic budget for your construction project. This will not only demonstrate to lenders that you have done your due diligence but also that you have planned for all aspects of the project.

Include details such as the cost of purchasing the land (or its current value if you already own it), the costs for materials, labor, and equipment, and estimates and quotes from contractors.

Other important details to include in the budget are any fees that you are paying for your team (engineers, designers, etc.), permits and legal fees, as well as utility and infrastructure costs (if applicable). 

Don’t forget to have something down for a contingency fund, usually 5 to 10% of the total construction cost, to cover unexpected expenses or overruns. 

You can also include operational costs during the construction process – just don’t forget commercial construction loans do not cover that post-construction operational costs. 

That’s because commercial construction loans are designed for a specific purpose – covering the costs associated with the construction phase of a project – and don’t have a generic nature like other types of 

5. Prove experience in similar projects 

Demonstrated experience in similar projects is important if you are looking to meet all the requirements for commercial construction loans. It gives lenders confidence that you are able to successfully finish the project and repay the loan, which reduces their risk.

In addition, lenders may offer more favorable terms, including lower interest rates or down payment requirements, to businesses with a proven track record.

There are multiple ways in which you can prove your experience, including:

• Portfolio of previous construction projects
• Reference letters from partners or past clients
• Financial statements of past projects
• Industry awards, certifications, or recognitions
• Press coverage
• Project case studies
• Testimonials

6. Be prepared to provide collateral

When applying for a commercial construction loan, you should be prepared to provide collateral. When it comes to the requirements for commercial construction loans, what typically serves as collateral are the land and the building itself once completed. 

However, depending on the size of the loan and the lender, other types of collateral may also be needed. This can include the personal assets of business owners, other real estate properties owned by the business, existing equipment or inventory, etc. 

7. Get your financial statements

Among the most important commercial construction loan requirements are the financial statements of your business. Lenders will use them to assess your financial stability and determine if you are able to repay the loan. 

In addition, these statements provide insight into your credit history and management skills, which are crucial for a lender’s risk assessment.

Be prepared to show the following to your lender: 

• Balance sheet – Including the assets and liabilities of the business, as well as its equity at a specific point in time. 
• Cash flow statement – To show how cash flows in and out of the business, which is essential for showing that the business can sustain its operations.
• Business tax returns – Just like personal tax returns, business tax returns provide a verified record of the business’ earnings and tax compliance.
• Income statement – The lender will use it to evaluate your revenue, expenses, profits, and losses over a specific period of time.

In addition, keep in mind that personal financial statements may also be needed to assess your loan applications. This can include but is not limited to, net worth statements, income statements, credit reports, and tax returns. 

8. Obtain adequate insurance

Insurance is a critical component of any commercial construction loan as it protects both you and the lender. Depending on the project’s nature, location, and complexity, you may have to obtain one or even multiple types of insurance for your construction project.

The most common ones include:

• Builder’s risk insurance
• General liability insurance
• Professional liability insurance
• Workers’ compensation insurance
• Commercial auto insurance
• Property insurance
• Title insurance

If you are not sure what type of insurance you need for your project, speak with your lender for professional guidance.

Which is the most common insurance needed for a commercial construction loan?

The most common insurance required for a commercial construction loan is Builder’s Risk Insurance. It covers the construction project against risks like fire, theft, and natural disasters during the building phase.

Is general liability insurance mandatory for construction loans?

General liability insurance is typically mandatory for construction loans. It protects against claims of property damage, bodily injury, and legal costs arising during construction, ensuring financial protection for both the borrower and lender.

What coverage amount is needed for builder’s risk insurance?

The coverage amount for Builder’s Risk Insurance typically equals the projected construction cost. This amount should cover the total value of the project upon completion, including materials, labor, and other construction expenses.

Applying For a Commercial Construction Loan 

If you are looking for the right lender for your commercial construction loan, 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.