Why Mid-Construction Loans Are Key in Commercial Construction
Commercial construction projects often face a myriad of dynamic challenges. Mid-construction loans can play a vital role in ensuring project success by providing flexible financing for unexpected costs or scope changes, all without needing to fund 100% of the costs up-front. Mid-construction loans offer a lifeline for commercial construction projects, providing flexible funding for continuous progress and managing unexpected costs or scope changes.
Unleashing Growth: The Advantages of Construction Loans for Subcontractors
Construction loans offer vital benefits to subcontractors, including improved cash flow enabling them to undertake larger, more profitable projects.
In addition to financing the building process, construction loans can be used to pay for equipment, building materials, and hiring employees. They are particularly useful for new construction projects, allowing builders or homeowners to finance the construction of new buildings. These loans come with high-interest rates due to the inherent risk involved. After the project's completion, borrowers can refinance the loan into a mortgage or repay it with a new loan.
Unmasking the Differences: Construction Loan Vs. Conventional Loan in Commercial Context
Commercial construction loans are distinctly different from conventional loans or commercial mortgages. They operate on a "draw schedule", a tailored plan detailing the release of funds at various project milestones. This helps manage cash flow and ensures that businesses only pay interest on the outstanding balance.
Construction loans have different structures, interest rates, repayment terms, and qualification requirements compared to conventional loans. These differences can significantly impact the viability of commercial construction projects. Experts opine that construction loans are ideal for large projects due to their flexibility and scalability.
Different construction projects require different types of loans. Here are the main types you might encounter:
Construction Mortgage Loans: These are used to finance the purchase of land or the construction of a home on land you already own. Lenders pay a percentage of the completion costs and release your funds in a series of payments, or “draws. You're responsible for interest and principal payments on the used funds.
Construction-to-Permanent Loans (CP loans): These loans combine construction and mortgage loans in a single process. You only pay interest on the outstanding balance during construction, at an adjustable rate pegged to the prime rate. The loan then converts into a standard 15- or 30-year mortgage upon construction completion.
Commercial Construction Loans: If you’re planning a larger project, like a multi-family home or commercial building, you'll probably need a commercial construction loan. These loans are usually interest only and retired via a balloon payment shortly after the project is built. Factors such as the quality, size and type of project determine loan amount which is typically 50% - 75% of the total project cost. The borrower covers the remaining cost with equity.
Factoring: While factoring — selling your invoices to a third-party company in exchange for a cash advance — can seem like a lifeline during periods of delayed payments and negative cash flow, it also carries substantial drawbacks, including higher costs, communication burden with clients, severe penalties for late payment, and the potential for companies to be held responsible for bad debt
Solidus Retention Loans: And now, a new type of loan has been introduced into the construction sector that is taking the industry by storm—Solidus is revolutionizing the construction industry offering subcontractors loans tied to earned retention at economical prices, making a new source of cash available that can use to manage cash flow and accelerate growth. Solidus also offers a financial partnership to subcontractors who are underserved in the construction industry.
Solidus Procurement Loans: Solidus also offers procurement facilities that subcontractors can use to pay for materials at delivery.
Refining Your Calculations: Making the Most of Builder Loan Calculator
Builder loan calculators help estimate loan costs and potential profits. These tools are essential for informed decision-making. Trusted online calculators like the one provided by Solidus can offer invaluable insight.
The retention calculator Solidus has built can show you exactly how much you can save using one of our programs.
See also our procurement calculator that helps you calculate your savings for materials and equipment through our programs.
Market Trends: Understanding Current Commercial Construction Loan Rates
Commercial construction loan rates can vary widely, from 5% to 18%, depending on factors such as corporate performance, lender policies, and market trends. Subcontractors can secure the best rates by maintaining good credit and regularly reviewing market trends.
Private Lenders Vs. Traditional Banks
Securing construction loans from private lenders or traditional banks each come with advantages and disadvantages. Factors like loan terms, flexibility, and approval speed are among the many considerations when choosing a funding source. Traditional banks, credit unions, SBA-approved intermediary lenders, and private hard money lenders all provide various loan options with unique pros and cons. Industry experts recommend looking for lenders with transparent terms and robust customer service, like Solidus.
Planning Your Construction Loan Repayment Strategy
Commercial construction loans often include defined payment milestones. Effective budgeting and financial management are vital to meeting these milestones. If repayment becomes challenging, seek advice from your lender or a financial advisor.
At Solidus, we reserve all interest payments in an interest reserve account. This means that the subcontractor only makes one payment to Solidus at the time their retention is released. Solidus provides a monthly statement of all projects in the subcontractor’s facility, lowering the cost of accounting to the subcontractor.
Navigating Construction Loan Steps: A Commercial Subcontractor's Guide
Securing a construction loan often involves meeting several requirements, including:
Down Payment: A down payment of some percentage of the total project cost is often necessary. While most hard money lenders require around 20-25% down, there are other lenders that lend for just a small initiation fee down.
Application: The application process is thorough, requiring details about the project, including total funding required, builder details, a detailed project timeline, floor plans, cost of materials, and labor costs.
Strong Personal Credit: Lenders will examine your personal and business credit histories
Financial Documents: You’ll need to provide financial statements, tax returns, and proof of other assets.
Past Project History: Lenders scrutinize the builder’s reputation, whether that's you or a contractor.
Specific Plans: Detailed building plans, construction contracts, and cost estimates are a must.
Appraisal: Lenders work with appraisers to analyze your project and estimate its future worth.
After a loan is approved and funds have been dispersed, a subcontractor will likely be asked to report on the progress of the project. They will also be required to pay the loan back according to the agreement signed at the closing of the loan.
Navigating the complexities of construction financing can be a daunting task for subcontractors. However, with a reliable and transparent lender like Solidus, you can secure a cost-effective, flexible loan without these pitfalls.
