Securing a building loan is almost always on the top agenda of most small business owners because in most of the cases it is quite difficult for them to raise the capital required to grow and expand their businesses if, for example, a new outlet has to be built to target customers in a specific location.

It is still possible for a business to require a building loan if it wants to carry out a major renovation work on an existing structure and most hotels often do from time to time in order to keep their facilities in the best shape possible. Securing a commercial construction is something that is quite difficult even though a significant number of lenders claim to have construction loans on their menu.

The main reason for the difficulty in accessing construction financing is because most lenders consider commercial real estate lending one of the riskiest ventures. Even commercial banks that were hitherto known to be the leading providers of a building loan have, in recent times, appeared to be somewhat reluctant in handing out loans to businesses, small ones in particular.

This is something to be worried about since small businesses are what drives the United States economy and indeed the global economy at large. Before looking at what options small businesses really have in the present time in securing commercial construction loans, there is the need to examine, in close detail, what the whole process of seeking and obtaining a building loan entails.

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Construction loans and Construction Lenders

The whole process of obtaining a construction loan begins when a business through the site developer submits a request for a loan to a particular lender. And in most of the cases, the lender would either be a local bank or a regional bank.  The reason why banks have been the major source of construction finance is not far fetched from the fact that bank regulations restrict trade areas for lending such as construction. But, in recent times insurance companies, national banks now provide financing with a focus on construction and are all able to offer construction loans. But, in spite of this, community and commercial banks are still leading in the area of making a building loan available to small businesses because they have a thorough understanding of the local market and business conditions—but this might soon change.

Once the business has submitted its proposal for a loan that will finance its construction project, it often has the option of deciding on one or both of the two loans that actually go into construction financing. The two loans required to finance a business facility are in two forms: short-term loan and long-term permanent loan. The short-term loan is the one that goes into the implementation of the project. It funds the cost of raw materials, labor and every other thing that goes into the construction, and also funds the lease-up phase of the project. The second part of a building loan which also called the takeout loan is used to offset the short-term construction financing loan.

The takeout loan is usually obtained after the project is said to have achieved stabilization—a term which is used to describe the point where the building is worth more than the amount of money it took to construct. It is also quite possible for both aspects of a building loan to be combined into one, resulting in what is known as a combination loan. But, the combination loan is not exactly the construction loan plus the take out permanent loan.

In reality what is offered is the construction loan plus a so-called mini-permanent loan. This mini-permanent loan is a form financing that, although it helps take out the construction loan, is quite shorter than the traditional permanent loan. Indeed, the mini-permanent loan is meant to provide the business with some operating history prior to refinancing through the permanent loan market.

Underwriting the proposed building loan

The process of underwriting a building loan commences once the decision on the kind of loan that is to be obtained has been reached, that is, judging from the loan proposal whether it is a construction finance, takeout loan, or both. Whichever is the case, the commercial bank or any lender goes through an internal yes or no decision making process. If peradventure the loan application is approved at the senior management level in the bank, what follows is a term sheet to the business through the developer outlining the very terms and conditions of the loan—that is, of course, if all the information provided in the application for the building loan has been found to be correct and also reasonable.

After the borrower reviews the non-binding term sheet, it decides to negotiate and then for our purpose accepts the loan offer. Once this is achieved, the lender institutions proceed to do a full underwriting and approval of the proposed loan—a process which could take a substantial amount of time.

It is during this process of underwriting the building loan that the lending institution evaluates the performance of the proposed project. Details concerning the cost of construction market conditions in the site locale are also sorted out during the underwriting process. Furthermore, it is through the process of underwriting the loan that the lender evaluates the competence of the development team as well as the financial strength of the project guarantors, ensuring that it (the lender) has a firm grasp of the inherent risks in the loan request.

Documents that often assist lenders in the process of underwriting the building loan include financial statements tax returns of the borrowers/ guarantors and a schedule of real estate and contingent liabilities that are owned by the guarantors. Documents also detailing the expected performance of the project, cost estimates by the developer, project plan from start to finish, engineering plans, and any other document that could be used to back the loan request.

So far it is apparent that the process of underwriting a building loan is somewhat different from that of underwriting a conventional real estate loan. In a typical real estate loan, there is no requirement to underwrite operating history. In such a loan, the decision on whether or not the borrower is to be granted the loan is based entirely on the projected performance of the real estate project. Although the credit approval process bears many similarities to those of commercial loans, construction loans deserve further consideration and evaluation because of the risks that are inherent in them.

That is exactly why attention is given to the development team in place and also the current market conditions. So, once the building loan has been approved, the banks would normally issue the customary binding commitment letter to the business through the developer. The commitment letter is not much different from the term sheet which must have been issued prior to the present time, but it contains much more detail about the loan is also a legally binding document which the term sheet is not.

Closing the building loan and what happens after that

Once the underwriting and approval of the construction loan have been accomplished, the loan is moved to the process of closure, which in itself can be a time-consuming process. In short, the process of closing the loan can be very complex—perhaps more complex than that of application! The documentation that is involved in closing a building loan can be overwhelming.

To proceed with the closing, the borrower has to involve an attorney while also participating in the process.  On the other hand, the project developer is issued with a loan closing checklist as well as a copy of the legally binding letter of commitment. The commitment letter issued to the developer normally outlines the details of what and what needs to be on the ground before the loan closes in order for the lender to begin providing funding. Thereafter, when the loan has been closed, the loan administration department in a bank is responsible for handling issues pertaining to the loan—the loan mechanics. It is the responsibility of the loan administrator to fund the project in accordance with the policies of the bank. The funding of a building loan is usually provided partially at the closure of the loan in order to cover up for prior cots—both the so-called hard and soft costs. After this initial funding, the project is funded on a monthly basis based requests from the developer for the costs incurred. These costs have to be verified by the bank before funds are disbursed.

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Merchant Cash Advance

All that has been discussed neatly outlines the ridiculously exhaustive process a business goes through before obtaining a construction loan from a bank. It is obvious how complex the process can be. Moreover, getting the loan request approved can be very, very difficult. As a result, small business owners are looking in the direction of alternative lenders such as merchant cash advance in order to secure funding.

Another path to take that involves less sweat and bureaucracy is exploring the quick option of merchant cash advance. When compared with the conventional bank loans, acquisition of merchant cash advance is done at jet speed while bank loans acquisition pace struggles at snail speed. Such deficiency in the speed of securing bank loans can be enormously frustrating for the business owner.

Merchant cash advance providers remove several of the difficulty associated with securing a building loan, speeds the whole process while ensuring a high approval rate. Therefore, it is no surprise, therefore, that small business owner currently views merchant cash advance as the best alternative to bank loans. Wouldn’t you rather choose merchant cash advance and get your funding in hours rather than apply for bank loans and grow gray hair waiting for the loans to be approved?