When you and your colleagues come to the decision that it’s time to move forward with planning your commercial construction project, there will be a lot to consider. Contractors, permits, designs, vendors, and budgeting will all be necessary conversations. But one of the most significant first steps you’ll take on this commercial construction project journey involves financing. And there’s more than one way to finance your build. Today, we’ll share a host of creative ways to explore funding for your commercial construction endeavor.
Determine the Rough Size and Scope of Your Project
Before you seek out funding for your commercial construction project, you’ll want to first determine the ideal size and scope of your project. Along with that, you’ll decide if you have a large-scale project, a medium-scale project, or a small-scale project. Knowing these parameters will help you be more precise when seeking and requesting financing.
Large-Scale Projects
If your organization is moving forward with a large-scale project, you’re likely building a sizable structure. These categories are usually reserved for shopping malls, sprawling complexes, hotels, airports, or municipal buildings. These projects can take more than a year to complete.
Medium-Scale Projects
In a medium-scale project, you might be looking to expand on an existing structure. These categories might include adding a wing to a hospital, adding another floor to a commercial space, or a small out-of-the-ground project. These projects can usually be completed within six months to one year.
Small-Scale Projects
If your commercial construction project involves more of a remodel, say of a retail space or commercial property, it would be a small-scale project. In any project where an existing commercial space needs to be revamped for new use or improved commercial opportunities, it’s considered small-scale. These projects can often be completed in under six months.
Determine Your Financial Strength
Another significant piece of the commercial construction financing step is understanding your financial strength and potential borrowing power. As an organization, you can organize your financial information and prepare to explore various options to secure funding. Here are insights to consider as you evaluate your company’s financial health.
- Prepare and have on-hand your company or nonprofit’s most recent tax returns.
- Prepare and have completed Year-to-Date Profit & Loss Statements ready for review.
- Prepare and have completed Balance Sheets ready for review.
- Prepare a complete roster of company assets for potential collateral considerations.
Ideally, your tax returns, balance sheets, and profit & loss statements will demonstrate to any lender or financial partner whether or not you can afford the commercial construction project. Not showing all your potential income could take up to two years to confirm. So being prepared with a complete financial review is essential for streamlining the lending application process and securing funds for your build. It’s also recommended that you build up cash reserves and demonstrate to any lending partners that you have enough to cover any required down payments or closing costs. Additionally, some commercial construction projects secure financing by leveraging other property as collateral, which can be helpful in your situation, as well.
Understanding the Different Types of Financing
When it comes to financing your commercial construction project, you can get about as creative with funds as you can with designing your project. In general, however, there are typically three categories of funding to explore.
Equity Providers: These funding options usually result in the sharing of equity with those who fund or finance the project. If there is an option for stocks or private equity funds, they can serve as the basis for this type of financing.
Debt Providers: These financing options are those you might secure from your local banks. Funds are provided in exchange for a debt (secured or unsecured) that you’ll be responsible for paying back with interest, according to loan terms and timelines for repayment.
Institutional Investors: This kind of funding might include insurance or pension funds, whereby large sums of money can be invested into your commercial construction project over time.
With these financing categories in mind, you can begin to explore the various options for lending, donations, grants, and funding that make the most sense to your organization and project.
Traditional Financing Options
Depending on your organization and its borrowing power, you might be able to easily secure a traditional loan for your commercial construction project with the bank. Community banks, credit unions, and commercial banks are all great first-step options for exploring financing. Just remember to have all your financial health documentation ready when you begin connecting with potential lenders. From flexible lines of credit for various stages of build-out to short-term construction loans, you could discover great financing solutions traditionally with your trusted banking partner.
SBA Bank Loans
While these types of loans can be more difficult to secure, a Small Business Administration (SBA) loan is still an option for some organizations looking to fund a commercial building project. The qualifications are steep, and the application process can be lengthy. However, if your organization and project qualify, you can explore one of the two following financing options.
504 Program Funding
Loan terms may vary for these funds. Additionally, 504 Program funds are multi-purpose, encompassing uses like commercial property design, real estate, construction equipment, and mechanical contracting. Typically, these SBA loans can be up to $5 million per project.
The 7(a) Program
This program is similar to the 504 Program in that you can borrow up to $5 million per project. However, repayment terms for commercial equipment are seven years, whereas other loans allow for 25 years.
Hard Money & Private Lending
Your organization can explore hard money lending as an option for financing your commercial construction project. Private investors issue these kinds of loans, and there may be stipulations and requirements different from traditional loans. Because these private lenders might be people you know, you could secure more favorable repayment terms. But in most cases, these types of loans will come with higher interest rates than those associated with more traditional lending options.
Capital Campaign Funding
This type of commercial construction financing can take longer to secure since they rely on the collection of donations. Churches and nonprofit organizations often explore these financing methods since the donations don’t require repayment. This type of funding can prolong project completion. However, if your commercial build is designed in phases, capital campaign funding can be a helpful method.
Insurance Company Backed Loans
In any lending scenario, individual or otherwise, it can be helpful to leverage borrowing power based on assets. However, it’s not widely known that insurance companies can also underwrite commercial construction loans. And while most companies are more interested in underwriting existing properties, some do offer commercial construction loans. Life insurance-based loans, for example, can provide up to $1 million in funding with a 30-year repayment term.
Financing Is Just One Aspect of Your Commercial Construction Project
Keep these financing options in mind as you begin your efforts with your commercial construction project. The funding can be as unique as your organization. Make sure you select the best-fit option for you, both long and short-term. And remember, financing is only one pivotal aspect of your journey. Don’t go it alone when you work with Jerdon Construction. Our team can help you with every stage of building, including the best practices for managing costs and budgets along the way.
As the Lehigh Valley’s premier partner for construction projects, we’ve helped many entities with their retail spaces, healthcare facilities, educational facilities, and faith-based structures. Whatever you have planned, let our team of experts help you and your organization every step of the way!
