Construction Business Financing

Where to find construction business financing

Fundbox

✔ Funding: Borrow $2,500 - $150,000
✔ Minimum Credit Score: 600
✔ Loan term: 12-24 months
✔ Funding turnaround: as fast as next business day

Fundbox requires minimal documentation and access to a revolving line of credit without origination or maintenance fees. Borrowers are not required to have collateral (with exception of larger credit lines which are subject to a personal guarantee).

COMPARE LOANS

What is construction business financing?

A construction loan is a loan provided by a bank or other financial institution for the acquisition of land and the building of a home or other building. It is usually a short-term loan and the interest is often on the high side.

When you buy an existing home you get a mortgage but to finance your self-build project you need a construction loan.

How does a construction loan work?

A construction loan can be used by anyone looking to get finance to build a home, a commercial property, or other real estate project. Lenders need to charge a higher interest rate and a substantial down payment because, until the building is completed, there is very little of value to act as collateral for the loan.

These loans are usually time-dependent, lasting only until the project is completed. With an approved timeline the lender makes the funds available. This works like a line of credit rather than a term loan. The borrower will draw the cash they need for each stage of the construction, only paying interest until completion.

Periodically the lender will send someone to inspect progress, releasing money as appropriate. The borrower only pays interest on the money borrowed, not the entire amount.

Once built, the borrower is often able to convert the loan into a mortgage – known as a construction-to-permanent loan – or seek a mortgage from another lender to repay the loan.

A construction loan can provide money for the equipment needed, the hiring of contractors, and the building materials as well as the purchase of the land.

What can construction financing be used for?

• New construction (residential and commercial developments)
• Land purchase and development
• Permits
• Contractor labor-related expenses
• Building supplies and materials
• Damage expenses
• Hiring contactors
• Company facility expansion

Can I use a construction loan to renovate a home?

Yes, but in most cases, it won’t make sense to do so. Unless you’re embarking on a big renovation (such as an entire single family home, multifamily home, apartments, and similar) you’re better off looking at other personal loan options.

What are the different types of construction loans?

• Construction-to-permanent loans: As mentioned above, if you take out a C2P loan, at the completion of the building project the amount outstanding is converted into a traditional mortgage. This mortgage will have low-interest rates and a generous term because now the finished building has value and is the collateral. A C2P loan has the advantage of reducing paperwork and only incurring one set of closing costs.
• Construction-only loans: Does what it says on the tin and pays purely for the purchase of land and construction. Once the building is finished the borrower is responsible for repaying the entire debt by the due date. This will often mean approaching a mortgage company to supply the money as when buying a house.
• Renovation construction loans: Some lenders will be willing to finance renovations with a construction loan but only if structural changes are necessary. You may be better advised to seek a renovation loan from the FHA or a HomeStyle loan from Fannie Mae.
• Commercial construction loans: If you are thinking bigger than a single home or property you should probably look for a commercial construction loan. However, because of the risks involved lenders typically want the developer to provide much of the money themselves.

What are the pros and cons of construction loans?

PROS

• A construction loan allows you the chance to build your dream house when otherwise you don’t have the capital.
• You only pay interest on the amount drawn.
• It is a more customizable way of borrowing that will fit your project.
• The lender will help make sure the construction stays on time and on budget.

CONS

• Higher interest rates than some other loans.
• You need a plan to pay off the loan at the end of the project if you haven’t got a C2P loan.
• A construction loan can be hard to qualify for and you’ll need a down payment.

How much down payment is required to qualify for a construction loan?

Generally, you will need a minimum 20% down payment before a lender will be prepared to lend you the money. Many loan companies demand even higher percentages, commonly 25% to 30% of the total cost involved.

Construction loan payment calculator

Try our construction loan calculator to estimate your monthly payments below.