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So, you’ve come to a crossroads where you know it’s time for your business to grow. Perhaps you are currently renting an office space and have decided it’s time to build your own office building. Or your team is outgrowing your current facility and you need an expansion.
You’ve realized that a commercial construction loan is probably what you need to make your dreams come true. But before you apply for a construction loan, know what commercial construction loan requirements are necessary for you to qualify for one.
We are going to cover common commercial construction loan requirements for business owners. Read on to learn what criteria your business must meet to qualify for a construction loan.
Commercial construction loan requirements vary from lender to lender but here are some of the most common construction loan requirements.
You will need an excellent credit history to qualify for a construction loan. Since construction loans are typically large amounts, lenders will be looking for low-risk borrowers with high credit scores. Business owners will typically need a credit score in the high 600s at the very least, depending on the lender.
As with any loan, a common construction loan requirement is a low debt-to-income ratio. Usually, lenders prefer a debt-to-income ratio of under 40%. To calculate your debt-to-income ratio use this formula.
Total Monthly Debt Payments / Gross Monthly Income = Debt-to-Income Ratio
You’ll need to have enough collateral so that the lender will secure its investment if your business defaults on the loan. This collateral might include assets like equipment, accounts receivables, or other property.
A business’ debt service coverage ratio (DSCR) is also evaluated in the loan decision process. This tells lenders how much income a business generates annually as a percentage of its debt servicing costs. A high number indicates a business has enough income to cover its debts. To calculate your DSCR, use the formula below.
Net Operating Income / Current Annual Debt Obligations = Debt Service Coverage Ratio
When applying for a construction loan, a business should have identified a qualified builder for the project. This typically means finding a builder who has verifiable completed projects and is a member of a reputable general contractor association.
Many lenders require a detailed construction plan for the project during the loan approval process. This includes blueprints, floorplans, specifications, timelines, and more. Suppliers, materials, and labor costs may also be required details.
More construction loan requirements include a business’ current income tax returns and profit and loss statements. Lenders want to ensure a business is in compliance with tax laws, is operating profitably, and all payments are current.
A large down payment is another common construction loan requirement. The average down payment requirement ranges between 25% to 50% of the total project cost depending upon the specific lender.
These were the most common construction loan requirements. Specific requirements may vary based on your chosen lender.
AVANA Capital is a leading lender that can offer borrowers commercial construction loans with flexible terms. Our commercial construction loans only require 25% to 35% down payments and we even offer interest only payments for the first two years. It is our mission to serve business owners by providing fast and reliable financing.