Construction Financing for Builders: How to Secure a Construction Loan in a Volatile Market

construction-loan-spectrum-capitalIn today’s lending market, construction financing can be hard to locate. The current economy has been particularly unforgiving to the construction industry. This has left many builders scrambling to find sources of funding for contracted building projects or property-improvement plans.

So what’s the best way for your construction company to secure the business financing you need?

You must leverage your existing property values against the loan amount you’re seeking. As the value of any properties you own increases, so too do the funds available to help you complete your building projects.

First, you might consider going a conventional route for your financing through a traditional bank or credit union. Just remember: These financiers select which construction projects they back the same way they approve any other loan, and nowadays the construction industry is seen as particularly risky to banks. This means applying for a traditional bank loan can often be an arduous process for builders, with a very limited loan approval rate.

The application process includes their underwriters reviewing such aspects as:

  • The financial strength of your project
  • The financial strength of you, as a borrower
  • Your personal credit worthiness
  • Your net worth

Plus, these days, any commercial real estate loan — with the exception of owner-occupied — is subject to enhanced scrutiny. And construction projects for tenanted buildings can also require certain levels of presold units or occupancy commitments not only at the beginning of the project, but also at different stages of completion as well.

With all the hoop-jumping that traditional banks make you do, a large secondary market for construction loans is private lenders. These lenders tend to charge somewhat higher rates, but the upside is that they are also prepared to fund deals without the same level of scrutiny required by traditional banks. They can self-police their loans by requesting higher amounts of builder equity in their deals. The more equity you put in, the better terms you can get.

Even though private-equity sources charge more, the reality is that construction financing is only required for a short period of time, so the additional costs can still be manageable within the budget of your overall project.

While construction loans are very common due to the amount of building that takes place every year, there is still complexity to the loan application procedures and a fair amount of risk to manage when seeking a loan of this scale — regardless of whether you choose to use a private-equity lender or go a more traditional route through a bank or a credit union.

Those who go into the construction loan process uninformed can experience higher costs and much larger problems down the road.

So you can either put in the time and do your homework on your own, or seek the assistance of a financing professional to help you locate the best source of financing to meet your needs.

The financial advisors at Spectrum Capital have worked closely with numerous business owners in the construction industry who have chosen alternative financing — many of whom were previously rejected by banks. And you don’t have to have a spotless credit history to get the funding you need. What’s more, we can often get you funding much more quickly than a bank or credit union can.

Contact us today and let our financial experts help get you the construction financing you need.

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Construction loans aren't what most people think about first when they start considering building, but they're extremely important. And people don't always realize that personal credit score does affect whether or not they're going to get the loan they want. Taking just a few minutes to research can save a lot of money in the end. |

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