How To Finance Your Construction Project

Lacking the appropriate financial means can delay your commercial construction project. Don’t be too quick on the draw, there is a process for everything including financing your commercial construction projection. Project financing involves soliciting a proposal from a financial institution, carefully reviewing the terms and conditions of that proposal, obtaining a satisfactory appraisal, ensuring clear title to the property and then closing on the loan.  This process can take 3-4 months so it’s best to start early. Here are some tips and simple steps to secure your construction loan.



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Make your project specifications clear

Your bank is going to require the following information when you seek financial means for a commercial construction project. First, they will want to know the location and associated land cost if applicable. They’ll also be curious about the budget including construction cost, equipment costs and soft costs like title work, legal fees, permits, municipal fees, and insurance.

Lastly, make sure you have a set of plans and specifications. The more prepared you are for your project, the better you’ll look.



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Go through the bank proposal

The bank is going to prepare a proposal for your review based on your project specifications. Most banks offer five year loans with twenty year amortization that require the owner to provide at least 20% of the equity required and the bank loaning the remaining 80% of the funds.

If you’re a start-up or existing small business, you may qualify for a SBA Loan from the U.S. Small Business Administration. That being said, your bank must participate in the SBA program to participate. There are a number of guidelines for these loans. If your firm qualifies, you may be able to reduce your equity to 10% while the bank increase theirs to 90%. The federal government provides backing for these loans so they generally take longer to approve and include additional fees. It is usually worth discussing this option with your banker to determine if it makes sense for your particular project.


Banks usually include loan covenants with their proposals. Typical items include debt service ratios that must be maintained, prepayment penalties to encourage you to keep your loan with the bank and personal guarantees.  It is generally a good idea to review them with your attorney and CPA to ensure you fully understand what the bank is proposing and what your obligations are.



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Accepting the proposal

Once you accept the proposal, the bank will order an appraisal. Appraisals usually take four to six weeks to complete. The bank can only loan based on the appraised value of your project so the appraisal is critically important to finalizing your agreement with them and signing the loan documents. If the appraisal comes in at or above the total project cost you continue moving toward closing.



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Title Time

The final step is the title work for the property. The bank wants a clear title so they can be assured of being the first secured creditor. If the title search identifies any issues, they will need to be resolved prior to closing.


Sign your loan, and you’re set to start construction! Keep in mind the more you prepare, the smoother that this will go. Good luck with your project!


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