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Are you a business owner thinking about starting a construction project? A construction loan can help you see the project to successful completion without impacting your business’s cash flow and reserves.
Because of how capital-intensive they are, construction projects can put significant stress on a business’s financial operations. It doesn’t help that it takes time before your business starts to benefit from the completed project.
A construction loan eases the pressure on your working capital, ensuring you can keep running your business while still undertaking construction.
At PSA Capital Investments we offer flexible construction loans with fair terms and affordable repayments to help our borrowers complete their projects and exit quickly without any penalties.
What Is a Business Construction Loan?
A construction loan is a type of short-term financing specifically meant to fund the construction or renovation of commercial property.
A construction loan can be used to cover costs directly related to the project including hard costs like land acquisition, materials, equipment and labour, as well as soft costs such as permits, architectural fees and legal fees.
Unlike traditional business loans that are not limited to a specific purpose, only businesses that are undertaking a construction project can apply for a construction loan. This can be a new construction project, expansion of existing business premises or renovation work.
3 Ways You Can Use a Commercial Construction Loan
1. New Building Project
You can apply for a construction loan to construct a building from the ground up such as a new store for your business, a new hotel or a new industrial facility.
Typically, a construction loan can finance the entire development process from the initial land acquisition to the final stages of construction.
2. Extensions
If you are adding extensions to a current building, a construction loan can fund that as well. This is helpful if you want to make your current store bigger, add new office space or expand your commercial storage space.
3. Renovations
A business construction loan can also fund a renovation project. It can cover renovations intended to improve the functionality or aesthetics of a building, as well as renovations to repair an old or damaged building (e.g. after a natural disaster).
How Do Business Construction Loans Work?
Business construction loans work quite differently from mortgage loans and traditional business loans in terms of financing cycle, what you can use the loan for and repayment terms.
Here are the key steps involved in applying for, utilising and repaying a construction loan.
Planning
Before you even apply for a construction loan, you need to plan your construction project from beginning to end.
Get all your architectural drawings ready, get the necessary permits, apply for builder’s insurance and anything else you need to do to prepare for the project. In addition, you’ll need to calculate costs for the entire project including permits, materials, labour and contingency costs.
All these documents will be necessary to support your loan application. Other details you may need to provide include the expected project timeline, estimated value of the completed project, and which experts you plan to work with.
Loan Application and Approval
Once you apply for a construction loan, the lender will conduct due diligence to determine whether to fund the project, the loan amount and the financing terms.
They will review and verify the documentation you’ve provided, carry out additional analysis and valuations and check your personal and business credit history.
If they are satisfied with the viability of your project and your ability to repay the loan, the loan is approved pending your agreement to the terms such as:
- Loan-to-Value Ratio or LVR. This is the size of the loan relative to the value of the completed project. It ranges between 45% and 75%, with the borrower having to fund the remaining amount.
- Repayment period, which typically matches the timeline of the project.
- How the loan amount will be disbursed; most construction loans are disbursed progressively for each completed stage of the project.
- Repayment terms. Construction loans are flexible, usually allowing borrowers to only make payments on interest during the constriction period. They can then convert the remaining loan amount at the end of construction into longer-term financing.
Construction and Completion
Unlike regular commercial loans, construction loans are not released as a lump sum. Instead, the lender makes progressive drawdowns with each stage of construction. Frequent inspections ensure that each stage has been completed to satisfaction before funds are released.
Once the project is completed, the lender may offer an option to convert the remaining amount into a mortgage or long-term business loan.
Get Started With A PSA Construction Loan
Ready to kickstart your construction project? PSA offers affordable and flexible construction loans to help bring your project to life.
Contact us on 03 9847 7516 to talk to an expert today.
Disclaimer: The information contained in this document is of a general nature only and has been prepared without taking into account your objectives, financial situation or needs.
