Construction
Loan for Construction Projects
Thinking of building from the ground up or have a remodel in mind that will be essential to your business growth?
SBA financing can help finance your entire project.
Some of the items that you should have prepared to share with the banks are the following:
Construction contract: this is an obvious one but essential so that the bank knows how much you need to finish the project. In order to obtain a construction contract you should have already gone through the process with an architect and had plans finished for a contractor to review. Most lenders out there prefer you use an AIA contract (Fixed Firm) contract. This is a contract that prevents the contract price from fluctuating throughout the process.
The lender will need to review your financials to see if you can afford the build and will ask for the last 3 years business tax returns, personal financial statement, and at last your most recent personal tax return.
The contractor that you hire needs to be licensed in the particular state the project is in. The borrower cannot act as their own general contractor unless they are licensed as well. A self managed project comes with a log of red tape so call the gurus today to discuss further.
What Role Does Contingency Play?
Contingency will need to be added into the overall project to act as a buffer in the event that the construction project goes over budget which happens very often. Contingency is money set aside usually 10% of the overall construction budget. This is here to account for any cost overruns that happen during the project.
Interim Interest will also need to be added into the project. This is money set aside to allow the loan to pay for itself during the time that construction is being completed since more than likely the business won’t be open during construction and won’t be able to pay the interest payments on the loan due to not being able to generate revenue at that given time.
If the amount of financing you are requesting is over $350,000 the funds will need to be monitored by a third-party construction monitoring group that will assist in the closing process along side the bank to assist in making sure that the project is on track and is completed correctly.
On leased projects the landlord may contribute what is called a landlord allowance for tenant improvement. This is usually based off a dollar amount per square foot that is negotiated between tenant and landlord. Usually the landlord will only give these funds to the borrower after all work is completed. If you are planning on completing leasehold improvements talk to your landlord to see if he/she will be contributing to the project and if so, how much?
In regard to down payments on construction loans it can be anywhere from 0% down to 30% down if it’s a ground up construction loan.
If you have a project in mind talk to a guru or get matched up with one of our lenders to discuss the project and the best way to structure it that benefits you and your business most.