Understanding Business Construction Loans

A growing business will often outgrow its facilities – prompting smart business leaders to look to the future and consider a construction loan.

A business or commercial construction loan provides funding to create new structures, upgrade or renovate existing facilities, or expand buildings and work sites. This short-term funding can help with various construction-related costs.

At Merchants & Marine Bank, we understand growth opportunities in our region and want to help you understand how to finance the potential expansion of your business. Let’s talk about what a construction loan is and how they work.

What is a Construction Loan?

Construction loans provide short-term financing in a series of draws during the period of construction or renovation. These loans typically cover a wide range of construction-related expenses, including land, labor, materials, professional services, and landscaping.

Lenders secure the construction loan with the business’ land. Down payment amounts and loan terms can vary.

How do construction loans work?

Lenders work with the business to create a schedule for loan disbursements based on the construction project’s timeline. Often, specific milestones will trigger the ability to withdraw funds on the loan.

Based on the percentage of the project a lender is willing to cover, the remaining funds must come from the borrowing business as a down payment. This concept in construction loans means that the borrower’s money goes into the building project first. During construction, lenders typically only require interest payments on the amount already drawn from the loan.

Once construction is completed, businesses can either pay off the loan or often refinance into a more traditional mortgage-type loan.

Where do I get a construction loan?

Community banks like Merchants & Marine Bank strive to make construction loans available to their business customers for many types of projects. Some of these financial institutions also administer loans backed by the US Small Business Administration.

SBA loans, which are less risky for lenders, can be a great option for small businesses that qualify. Non-profit Certified Development Companies work with lenders to provide SBA 504/CDC loans.

SBA 504 loans, which are designed to promote business growth and job creation, may be used for new facilities, existing land or building purchases, or improvements to existing facilities. Qualified businesses can borrow long-term financing up to $5 million.

To qualify, companies must have less than $15 million in tangible net worth and generate less than $5 million in average net income after federal income taxes over a two-year period.

Work with the Experts

Merchants & Marine Bank is invested in the needs of small business owners. We work with our customers to provide various business financing options, including construction loans. Contact us today to learn more about our services and what we can do for you.