Securing any kind of commercial loan can be a challenge, but commercial construction loans are particularly difficult. That's because they are loans to fund something that is not yet established. You need to have a solid plan and prove yourself and your business to get approved for a loan like this. If you are getting ready to venture into commercial construction for any reason, here are some tips to increase your chances of loan approval.
Know What It Will Cost You
All loans have added costs, and construction loans are no exception. If you are going to apply for a commercial construction loan, you need to be sure that you have the money to cover those associated expenses.
Some of the things you will have to account for include the down payment, any inspection fees or certification costs, and the closing costs for the loan. In order to ensure that you have the money, you need to know how much those costs are going to be. As you start shopping for a lender, you can ask about those charges with each one. That way, you know how much cash you need available to finalize the loan.
Once you know how much the loan will cost, you can improve your chances of having a lender take you seriously by proving that you have the money to cover the initial loan establishment. You can show bank statements, investment amounts, and other figures to document this.
If, on the other hand, you do not have the money, you will need to find a way to cover those costs before you actually apply. There are only a few ways to do this. For example, you can liquidate some of your company's assets if you have things that the business no longer needs. Or, you can seek an investor who can help you with the upfront costs in exchange for revenue sharing either in a percentage or flat rate.
Show That Your Concept Is Profitable
Before you can get approved for a commercial construction loan of any kind, you will have to prove to the lender that your concept will be profitable. There are a few different things that they will want to see to prove this.
If you are looking to build a tenant-based property, do your research on similar properties in your area and determine how profitable they are. Have clear documentation of the revenue generation of these properties. For retail operations, you will need to show a history of sufficient revenue to cover the cost of the loan payment in addition to your other overhead and operating expenses.
You can also generate a projected cash flow statement if the new construction will allow you to expand and potentially increase your revenue. This projection should be as close to accurate as you can possibly project it to be.
Hire A Solid And Reliable Construction Team
Most commercial construction loans will require that you sign a guarantee of completion. Your lender will want the confidence that your construction team will get your project successfully to completion before approving the loan.
Look for a general contractor who has a history with the lender. Make sure that the contractor's history with that lender has been positive, which means that they have been part of successful projects that were financed by that lender.
You will also want an architect who can create blueprints with the confidence that the project plan is not only possible but accurate. Errors in blueprints as a result of architect mistakes will lead to costly changes having to be made mid-construction, which will affect your budget. The lender will want to see that your architect is one with experience and the blueprints are reasonable.