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Construction Loans: How to Increase your Opportunities

Construction Loans: How to Increase your Opportunities

When it comes to securing money for small businesses, construction loans are a great way to finance your next construction project. But not all lenders provide these types of loans, and those that do, usually have specific requirements you will need to fulfill to qualify.

This post will go over the types of construction loans, the benefits of a construction loan, and how to increase your chances of getting one.

What is a Construction Loan, and How Does it Work?

A construction loan is generally short-term and used to finance the construction of a building or other structure. The term usually lasts for one year, and at the end of the year, the borrower must refinance or pay off the loan. Interest rates applied on construction loans are typically higher than on a traditional mortgage because the lender has more risk. However, construction loans usually offer more flexible terms and conditions than conventional mortgages.

The buyer cannot apply for a regular SBA loan in the construction industry since there are different terms and requirements specific to construction companies.

Construction loans are typically used for construction projects where homebuyers will be purchasing the building once it is completed. These loans must be secured with collateral (in this case, the property under construction). If you default on your construction business loans payments and fail to make them by the due date each month, the lender can take possession of your property to sell it to recover their losses.

Types of Construction Loans

Construction Mortgage Loans :

This loan is used to finance a house’s land purchase or construction on land someone already owns. The lender pays a specific percentage of the completion costs, and the builder or developer spends the rest.

Construction Line of Credit:

This type of construction loan works like a credit card. The construction company can borrow up to a certain amount of money, and they only need to pay interest on the money they use. This type of construction loan is suitable for businesses with a lot of variability in their construction projects.

Term Loan:

A term loan is a fixed-rate loan used to finance a construction project. The construction business is responsible for making monthly payments until the loan is paid off.

Construction Bridge Loan:

This type of construction loan acts as a short-term fix to bridge the gap between traditional mortgages and construction loans. It’s often used when borrowers need more time before their construction projects are complete with refinancing or paying off the loan.

Who Should Get a Construction Loan and Why?

A construction loan is a good option for businesses that want to build or renovate a property. It’s also an excellent choice for companies that want to purchase land and build on it. The construction loan can be used to finance the entire project, or it can be used as a down payment on a traditional mortgage. There are a few things to keep in mind when deciding whether or not to get a construction loan:

  • The project must be feasible and have a good chance of succeeding.
  • The borrower must have the ability to repay the loan.

Adequate equity in the property is required to cover the construction loan cost.

  • The construction loan must be secured appropriately.

Construction businesses that meet these criteria might consider getting construction business loans. Construction companies should also take the time to compare construction loans and traditional mortgages before deciding.

How Do You Increase Your Chances of Getting a Construction Loan?

If traditional banks have strict requirements for loan grants, other lenders might be more lenient. But you still need to have a good personal credit score to raise your chances of approval. It would be best to have a strong business plan so that the lender trusts your dedication to finalizing the project on time and within budget.

As the project owner, you need to provide collateral. Lenders typically require some form of collateral to approve a construction loan. A financial institution is also more likely to approve borrowers with construction, architecture, or engineering experience.

What Are Some Ways You Can Use the Funds from Construction Business Loans?

You can use your small business loans for various things, such as:

  1. Pay contractors and suppliers

    Your project can get stalled if you don’t have the necessary funds to pay your suppliers and contractors. After all, suppliers and contractors are the crucial stakeholders you need to run your business.

    You can use construction business loans to pay contractors and other vendors for construction materials, equipment rentals, or labor.

  2. Pay off existing construction debt 

    Debts can feel like chains that weigh you down and prevent you from moving forward. If you have borrowed one tool and then one turned into twenty, you need to ensure you’re on top of your payments.

    If you have any outstanding construction debts from previous projects, a construction loan is an excellent way to consolidate them into one manageable monthly payment.

  3. Make improvements on your own property 

    Maybe you want to change the paint color, rebuild a wall, or install a gate. You might have an idea of what improvements your property needs, but a lack of finances is stopping you from achieving them.

    If you’re using the construction loan to fund a project on your property, you can use the extra cash flow to make some much-needed improvements to your home.

What Are The Benefits of Construction Business Loans?

For small business owners, it can be tough to kick-start another project without enough finances. The project might be ground-breaking or innovative on paper, but if there’s no money to make it a reality, it will be stuck on scrapbook status.

Small business construction loans can assist you with expanding your existing business and offering a quick project financing solution. You can borrow more money because construction loans are secured; you may be able to get a more considerable loan amount than with other types of financing.

Your credit won’t take a huge hit 

Most banks don’t provide loans for businesses with a low credit score. But how can you get a higher score if you don’t start advancing your business? 

Construction business loans don’t have the same impact on your credit score as traditional mortgages do because construction projects typically sell for less than homes.

You can also choose repayment terms that work for you

Usually, when you apply for a traditional loan, you won’t get flexible repayments. You will have to abide by their strict payment deadlines, and choices are limited.

Construction business loans typically have more extended payback periods than other types of construction projects, which gives businesses more time to make their loan payments.

Contact The Right Lender for Your Business

As a small business owner, you must show lenders a good personal credit score. The same thing can be applied to lenders themselves. They should also offer good business credit scores. Ensure to choose a lender with enough experience in construction financing. If they can’t provide you with a report on their past experiences, you can ask them about past construction projects they’ve financed.

When in doubt, ask for references from construction developers who the lenders helped before. Getting crucial information will prevent future problems affecting your equipment financing and project completion. You can also check out your local banks and credit unions to determine the types of construction financing they offer and which options are available and most suitable for you.

Secure Your Best Construction Loan

If you are looking to increase your opportunities with construction business projects, one of the best ways to do that is by using a construction business loan. Construction loans provide short-term and long-term financing options for contractors who need capital to grow their businesses or cover operating expenses until they can get paid.

Due to a lack of financing, many small construction businesses struggle to keep up with current projects and lack resources to take on more projects to grow. With Select Funding, you don’t have to wait for weeks or months to get a response for your small business loan application. With us, you can receive funding within 24 hours. Contact us today if you want to take your company from small contractor to big player!

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