To figure out whether a construction loan is right for your business or not, the first thing you need to do is assess the scope of your intention. If you are just starting up and looking for working capital, then there may be better alternatives; however, if you’re just looking to add a room to your property, build a new property for business expansion, or other, then a construction loan is tailored precisely for this purpose. It is, at its basest level, a short-term loan that covers all the costs incurred in such an undertaking, from getting the right permits, handling zoning issues, hiring contractors and planning mortgage payments.
The Different Types of Construction Loans
The most basic type is the Construction Only Loan, which has the unique requirement that it has to be paid off completely once the property is finished; as such, you need a significant amount of cash – or the projection of such – on hand immediately after the project is completed. This kind of loan does not account for continued mortgage costs.
Another type is the so-called Construction-to-Permanent Loan; here, it is essential that you have a blueprint and plans for the project already fleshed out – the lending institution will need to see these in order to provide you with this loan, since payments will be steadily ongoing as construction progresses. It does include a mortgage, too, so you won’t have to search for a second loan upon completion.
Thirdly, there’s the Renovation Construction Loan, which is best for property in need of repairs. The colloquial name for these types of homes/offices is “fixer-upper.”
Things to Consider Before Securing a Construction Loan
You need a relatively high marker of creditworthiness to have a reasonable chance of securing one. For example, a credit score of at least 680 is not unheard of; furthermore, there’s a 20% downpayment for most of them. The interest rate is higher than standard even with a good credit score, and monthly mortgage payments will be higher. With that said, a construction loan is a viable option for most businesses if you can meet these minimum requirements.