Business Capital
Construction Finance
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What is Construction Finance?
Construction finance provides funding specifically for construction and development projects. This includes loans for building commercial properties, residential developments, renovations, and infrastructure projects.
Construction financing is typically structured to provide funds as the project progresses, with draws based on completion milestones. This ensures that funds are available when needed while managing risk for both borrower and lender.
Key Benefits
Types of Construction Projects
Commercial Construction
Office buildings, retail centers, warehouses, and industrial facilities
Residential Development
Single-family homes, multi-family projects, and residential communities
Renovation Projects
Building renovations, upgrades, and adaptive reuse projects
Healthcare Facilities
Hospitals, medical offices, and healthcare-related construction
Hospitality Projects
Hotels, restaurants, and hospitality-related construction
Infrastructure
Roads, bridges, utilities, and infrastructure development
How Construction Finance Works
1. Project Planning
Develop detailed project plans, budgets, and construction timelines.
2. Loan Application
Apply for construction financing with project documentation and financials.
3. Draw Schedule
Establish a draw schedule based on construction milestones and completion percentages.
4. Construction Phase
Receive funds as construction progresses, typically interest-only payments.
5. Completion
Convert to permanent financing or sell/refinance the completed project.
Typical Terms
Types of Construction Finance
Construction Loans
Traditional construction financing with draw-based disbursements
Construction-to-Permanent
Loans that convert to permanent financing upon completion
Bridge Financing
Short-term financing for construction and development projects
Mini-Perm Loans
Medium-term financing for completed projects awaiting permanent financing
Commercial Construction
Specialized financing for commercial and industrial projects
Residential Construction
Financing for residential development and home building projects
Construction Finance Requirements
Construction finance requirements focus on project feasibility, borrower experience, and financial capacity. Lenders need confidence that the project will be completed successfully and generate the expected returns.
Key factors include the borrower's construction experience, project plans and budgets, market conditions, and exit strategy for the completed project.
Key Requirements
Project Plans
Detailed construction plans, budgets, and timelines
Borrower Experience
Proven track record in construction and development
Exit Strategy
Clear plan for project completion and financing
Market Analysis
Feasibility study and market demand analysis
When Construction Financing May Fit
Often a Good Fit When
- You are building new or substantially renovating
- You have plans, budgets, and a builder lined up
- You can manage a draw and inspection process
- You have a clear exit: sale, lease-up, or permanent financing
Consider Other Options If
- The project lacks firm plans or permits
- Your equity contribution is below what lenders typically expect
- You need funds for operations rather than construction
- Timeline risk would break the budget
Every business is different. Comparing options across lenders may help you find the structure that fits.
How Much Does Construction Financing Cost?
Construction loans typically price above permanent financing because the collateral does not fully exist yet. Expect interest-only payments on drawn balances during the build, plus inspection and draw fees. Total cost depends heavily on how long the project runs. Comparing lenders on rate, fees, and draw process together may save more than comparing rate alone.
What Affects Your Cost
- Project type and loan-to-cost ratio
- Builder experience and track record
- Draw schedule and inspection fees
- Construction timeline
- Exit plan: sale or permanent loan
- Borrower financials and equity
Funding guides by industry: Contractors & Trades
Frequently Asked Questions
Instead of receiving the full loan amount upfront, construction loans disburse funds in 'draws' as your project reaches specific milestones. You submit a draw request with supporting documentation (invoices, completion inspections), the lender verifies progress, and releases funds. During construction, you typically pay interest only on the funds drawn not the full loan amount. This keeps payments manageable while the project is being built.
A construction-to-permanent (C-to-P) loan starts as a construction loan that converts automatically to a permanent mortgage once the project is complete. You go through one underwriting process and one closing. During construction, you pay interest only. Upon completion, it converts to a standard amortizing loan. This is convenient and can save on closing costs compared to getting two separate loans.
Most construction lenders finance 65-85% of the total project cost (land + construction costs), requiring you to contribute 15-35% as equity. Lenders also look at the loan-to-value (LTV) ratio based on the completed project's projected value typically lending no more than 70-75% of the 'as-completed' appraised value.
Construction lenders require detailed project plans and specifications, a project budget with contractor bids, construction timeline, building permits, an 'as-completed' appraisal, your financial statements and tax returns, and a resume of your construction/development experience. First-time developers may face additional requirements or need a more experienced general contractor to strengthen the application.
Cost overruns are common in construction. Most lenders require a contingency reserve (typically 5-10% of project costs) built into the loan budget to cover unexpected costs. If overruns exceed the reserve, you'll need to fund the difference personally lenders generally won't increase the loan amount mid-project. This is why accurate budgeting and a qualified general contractor are essential before applying.
Not always. Land you already own can often count toward your equity contribution, and some loans fund the land purchase as part of the project. Lender policies vary, so raise it early in conversations.
Most construction loans charge interest only on the amounts drawn so far, paid monthly during the build. At completion, the loan is typically repaid through sale or converted or refinanced into permanent financing.
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