Navigating the Commercial Construction Loan Financing Market

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Author: Michael Russo | October 12, 2023

Thanks to the rise of online lenders, there are now more commercial construction loan financing options for contractors than ever before.

Two commercial contractors talking over plans on a jobsite
While commercial construction loan financing has come a long way, the wealth of choices available to roofers and other subcontractors — including internet lenders — makes searching, evaluating, applying and qualifying for commercial loans a challenging experience for the unprepared.

However, the wealth of choices available to roofers and other contractors makes searching, applying and qualifying for commercial construction loan financing a challenging experience. Even if you're not ready to grow your roofing company just yet, preparing for this process by reading up on your loan options can make all the difference.

Deciding Between the Two Major Loan Types

It's important to differentiate between a commercial loan and a commercial real estate loan. If the contractor has the property to put up or to buy, the owner-occupied commercial real estate serves as its own collateral, and interest rates are generally lower than those of other business loans.

The options here include:

  • A long-term, fixed-interest mortgage. This is similar to a home loan but with shorter terms and more uses.
  • An interest-only "balloon" loan. This option is geared toward contractors who are expecting a large payout at a future date.
  • A construction loan. This covers the material and labor costs of building structures or a large roofing project. In the latter case, it's possible that pre-purchased roofing materials can be used as collateral.
  • A "hard money" loan from private investors. This loan is based on the value of the commercial property itself, not the credit rating of the contractor. Loan terms are brief, but interest rates can climb.

Commercial real estate loans are perfect for financing the purchase or upgrade of a property, but they can be costly over time and come with a long-term commitment similar to a home mortgage.

Online Lenders

Internet-based lenders look at a contractor's business differently than a standard bank does, so they may be a good alternative to a traditional bank loan.

Online lenders typically consider several key data points to evaluate a contractor's creditworthiness. In addition to a personal credit score and business credit profile, they examine cash flow, annual revenues and other information.

These lenders tend to say yes more often than a local bank, with loan applications approved in a few hours instead of a few days or weeks. For this reason alone, online lending may be the first option for contractors to consider when looking at commercial construction loan financing.

SBA Loans

The U.S. Small Business Administration (SBA) offers lower interest rates than other lenders, partly because it doesn't loan money itself but instead works with banks and helps to guarantee paybacks.

There are several loan types within the SBA umbrella. The most common is the 7(a) loan program, which caps at $5 million.

SBA loans are easier to qualify for than traditional term loans, but the bar is still high. Contractors will need to have strong credit and a profitable business to qualify.

Traditional Term Loans

These loan types usually offer terms of one to five years and a wide range of rates. It's the most basic commercial construction loan financing option, with contractors repaying lenders through monthly installments.

Banks only work with the most qualified borrowers and profitable businesses. In general, interest rates are lower, but bank loans can take several weeks to fund.

Short-Term Loans

With a lower cap than traditional term options, these loans work well for business owners who have a small, one-time expense, such as an emergency or an unexpected business opportunity.

Qualifying for these loans is easier (businesses should be at least a year old and gross $50,000 annually), and they often process within a day. The trade-off is that APRs start around 10% and can rise to 80%, according to Fundera.

Equipment Loans

If contractors need to buy heavy equipment quickly, these loans may be of some benefit. Borrowing peaks at 100% of the equipment's value, with terms of one to five years. It's a lot like a car loan, and the equipment usually serves as collateral.

Business Line of Credit

Rather than loaning out a specific amount, banks and online lenders can issue lines of credit. The primary advantage of this loan alternative is you can withdraw and repay funds at any time. Credit scores need to be high, often over 600. If your credit isn't great, there are still online lenders who will extend a line of credit.

Cash Advances

Because they are so expensive, merchant cash advances should only be an option for contractors with a lower credit score (less than 600) and no collateral to offer. APRs can peak quite high, so it's important to consider other alternatives before going with a reputable lender.

With some basic documents ready, most contractors should be able to safely navigate the commercial construction loan financing waters almost immediately.