How Does Funding For Commercial Construction Work?

Expense Management
8 min
Nov 16, 2022

It’s no secret that the application process to be approved for funding for commercial construction is no walk in the park.

Generally speaking, funding for commercial construction is quite different from funding for a residential or another type of construction project.

It can be confusing to navigate the commercial funding process and you’ve likely got quite a few questions about how to apply and how commercial construction loans work.

In this guide, we’ll review:

  • How commercial building projects are funded
  • How commercial construction loans work; and
  • Your options for commercial construction funding.

Since we’ve established that applying and being approved for commercial construction funding isn’t a quick and easy process, it’s time to review the solution to the problem.

Say hello to Flexbase.

In short, a Flexbase subscription allows you to:

  1. Efficiently complete all paperwork required on a project
  2. Eliminate costly human errors
  3. Avoid small mistakes
  4. Get paid sooner
  5. Automate AIA billing forms
  6. Have access to payment applications and legal reminders; and
  7. Be instantly pre-approved by multiple lenders for working capital.

And no, you aren’t reading that last item wrong.

But, how can we promise that you’ll be pre-approved?

Flexbase can integrate with all of your company’s financial data, which makes getting approved for commercial construction funding much easier.

You’re eligible to borrow capital, boost your cash flow instantly, and see that money in your bank account in less than 24 hours.

It’s okay if you’re asking, “How can I get approved so quickly when the banks take weeks to give me an answer?”

Flexbase already has access to the information that typically takes the banks weeks or months to review, so we pass all of that along to our preferred lenders.

The result? Our customers are automatically pre-approved and don’t have to wait to get approved for working capital.

Because Flexbase can…

  • Securely access your financial statements
  • Integrate with each of your bank accounts and business tools
  • Analyze all the data; and then
  • Share all key elements anonymously with our lenders

…you no longer have to waste your valuable time gathering piles of paperwork for bank visits and negotiations.

Our automated platform makes the process to apply for funding for commercial construction work for you.

Now that you understand how Flexbase operates (and how your business can benefit), we’ll step back and take a big picture look at how funding for commercial construction works.

How Do Building Projects Get Funding?

Funding for commercial construction ultimately starts with capital.

A number of…

  • Investors
  • Banks; and
  • Lenders

…supply the capital needed to get the project underway.

It typically breaks down to 20% of the working capital is supplied by investors and the remaining 80% by financial institutions.

At the top, a commercial construction project could have hundreds of stakeholders and funding sources.

From there, the hierarchy works like this:

  1. Investors, banks, or lenders supply the capital.
  2. The capital is managed by the developer or project manager.
  3. The project manager uses that capital to hire a general contractor (GC).
  4. The GC hires subcontractors.
  5. Subcontractors then hire suppliers.

Who Are the Biggest Players in Funding for Commercial Construction?

The application process for funding for commercial construction begins when a developer requests a loan from a lender.

The majority of construction lenders today are community and regional banks.

Originally, this was because banks regulated trade areas for lending, effectively eliminating certain lenders because of location.

Nowadays, it is more common for:

  • Life insurance companies
  • National banks; and
  • Specialty finance companies

…to also be construction company lenders.

But, because community and regional banks have a strong knowledge of local market conditions and are well known to real estate developers compared to larger or national banks, you’ll still find them supplying the majority of construction funding.

Unfortunately, though, whether you’re applying for funding for commercial construction through national banks and or community lenders, be prepared for a bit of a hassle.

Hours of preparing bank documents, days of compiling paperwork, weeks, and weeks of waiting for an answer.

With Flexbase, all those tedious tasks can be a thing of the past.

Our platform seamlessly integrates with your…

  • Invoicing tools
  • Project management tools; and
  • Both person and business bank accounts

…that lenders will evaluate with your financing application.

We’re able to pass all of that information on to our preferred lenders anonymously, so you can reap the benefits of multiple different lending options that you’ve prequalified for.

Eligibility Requirements for Mainstream Commercial Construction Funding

When determining eligibility for construction funding, banks and other lenders will look at a variety of financial items and documents.

Be prepared for lenders to review your:

  • Business and personal credit history (This includes credit scores).
  • Business and personal tax returns for the previous two to three years.
  • Operating history and time in business.
  • Average annual revenues for recent years.
  • Bank statements and banking activity.
  • Assets you have available to offer as collateral or as a down payment.
  • Current business financial statements, including profit and loss statements, cash flow statements, and your balance sheet.
  • An updated business plan, including revenue projections for upcoming projects.

What Is a Commercial Construction Loan?

A commercial construction loan is a type of loan designed for…

  • Construction companies
  • Developers; and
  • Builders

…who work with contractors.

This type of loan works on a draw schedule, meaning portions of the loan are released after certain milestones of the project are completed.

The draw schedule allows you to pay subcontractors when smaller tasks like:

  • Framing
  • Painting
  • Plumbing; or
  • Wiring

…are completed.

The difference between commercial construction funding and regular construction financing is that while you are approved for a lump sum of money for both, a commercial construction loan is dispersed in incremental payments (aka draws).

Unfortunately, from…

  1. Juggling the piles of documentation required
  2. Negotiating interest rates; and
  3. Budgeting the time needed to be approved

…the process of traditionally applying for funding for commercial construction can feel like a logistical nightmare.

Flexbase simplifies the process to apply for working capital.

With your subscription, not only will you save yourself the hassle of dealing with creditors and banks, you won’t have to wait for their approval.

Instead of waiting weeks (or months), you can free up your cash flow and get working capital in 24 hours.

The Two Common ‘Phases’ of a Commercial Construction Loan

Traditionally, you’ll find there are two loans used to finance a commercial project:

  1. Short term financing: To cover construction and lease-up.
  2. Long-term/permanent financing: Takes over after a project “stabilizes” — aka leases up to the market level of occupancy.

Occasionally, you’ll find that a bank combines these two phases of construction loans into one.

When that happens, the phases typically break down to:

  1. A construction loan; and
  2. A mini-perm loan.

The purpose of the mini-perm is to take out the construction loan, but it is shorter in duration than traditional permanent financing.

How Do Commercial Construction Loans Work?

Unlike typical loans, commercial construction loans aren’t released in a lump sum. They’re disbursed when the GC submits a draw request.

The commercial construction company will work with the lender to create a draw schedule, meaning that partial amounts of the loan will be released as the project hits new milestones.

But what happens if you need additional working capital in between draws? That’s where Flexbase can help.

Schedule your free demo today to see your pre-approved financing offers and get money in the bank in less than 24 hours.

Financial Considerations

Aside from the numerous hours spent compiling all the necessary paperwork, there are a number of financial considerations involved with commercial construction financing.

You’ll likely be looking at:

  • Supplying a down payment
  • Negotiating interest rates
  • Paying several different fees

Read on to learn what to expect before you apply for commercial construction funding.

Because commercial construction loans are considered “high risk” loans by lenders, it’s rare that a loan would cover 100% of the project’s costs.

Down payments for commercial construction projects are normally between 10-30% of the total project cost.

Conventional lenders, like banks, use a loan-to-cost ratio calculation to determine down payment amounts for commercial construction loans.

Most require a loan-to-cost of 80% to 85%.

You find the loan-to-cost ratio by dividing the total amount of the loan requested by the total project cost.

For example: Your business is about to start work on an $800,000 commercial project and with a 15% down payment of $120,000, you’re looking to get a commercial construction loan for $680,000.

When you divide $680,000 by $800,000 you’ll find the loan-to-cost for your project would be right at 85%.

Another element that sets commercial construction loans apart from other loans is that you will only pay interest on the portion of the loan proceeds that have been received.

Because the total cost of your commercial project is $800,000 but the lender has released just $150,000. The only amount you will pay interest on is $150,000.

Generally speaking, you can expect to see interest rates from 4-12% for commercial construction loans.

And as with all other loans, those with good credit scores will be offered lower interest rates.

The specifics and number of fees you’ll be faced with will depend on what lender you choose to obtain your funding for commercial construction from.

A few seen regularly by borrowers include:

  • Guarantee Fees
  • Processing Fees
  • Documentation Fees
  • Project review Fees
  • Fund control Fees

Types of Funding for Commercial Construction

Depending on what you want to use the proceeds of your loan for will largely determine what type of funding for commercial construction you should apply for.

The three most common loans for commercial construction:

  1. SBA CDC/504 Loan Program
  2. SBA 7(a) Loan Program
  3. Traditional bank loans

Read on to learn how they are different so you can determine which is right for your next project.

SBA loans are guaranteed by the U.S. government through the Small Business Administration.

The 504 Loan Program, specifically, provides approved small businesses with long-term, fixed-rate financing used to acquire fixed assets for expansion or modernization.

The SBA’s community-based partners for 504 Loans are called Certified Development Companies (or CDCs).

A CDC is a nonprofit corporation whose main objective in providing 504 loans is to promote economic development within its community.

In working with the SBA and other participating lenders to support small businesses by supplying financing, a CDC accomplishes their goal to stimulate economic growth.

504 loans are typically structured as follows:

  1. The SBA provides 40% of the total project costs
  2. A participating lender covers up to 50% of the total project costs; and
  3. The borrower contributes 10% of the project costs.

The biggest factor in choosing a 504 loan will be what you intend to use the funding for.

Funding from 504 loans must be used for fixed assets only, which can include:

  • The purchase of existing buildings;
  • The purchase of land and land improvements;
  • The construction of new facilities or modernizing, renovating, or converting existing facilities;
  • The purchase of long-term machinery; or
  • The refinancing of debt in connection with an expansion of the business through new or renovated facilities or equipment.

Proceeds from 504 loans, however, cannot be used for working capital. So, if that is your aim, you’ll want to look towards the SBA 7(a) loan program.

With this type of loan, the SBA or Small Business Administration acts as an insurer.

The SBA backs the loan and lowers some of the burdens of risk from the actual lender, which could be:

  • Banks
  • Credit unions; or
  • Other lending institutions.

An SBA 7(a) loan can be used for many reasons, but a common incentive for this type of loan is that it can be treated like working capital.

Proceeds from an SBA 7(a) loan can also be used for the purchase or construction of commercial real estate.

There are currently nine different types of loans available in the 7(a) program.

Keep in mind that the terms and conditions, like the guarantee percentage and loan amount, may vary by the type of loan.

Before applying for an SBA 7(a) loan, you should be prepared to pack your patience.

The process can be particularly long because your lender will need to get approval from the SBA to back your loan, making the time taken to review and process paperwork and the actual application even longer than normal.

But, if your company has the time to wait, it could pay off as these loans typically offer better terms than traditional small business loans.

Traditional commercial construction loans from banks are another option for funding for commercial construction

Rates, repayment terms, and down payment requirements vary.

Generally, a minimum down payment of 10% is required, maximum repayment terms of 25 years are standard, and fixed and variable rates are available.

You can search for lenders by talking to your current financial institution, or simply log into Flexbase and see all the lending options you’ve already been preapproved for.

Partner With Flexbase to Expand Your Funding Options for Commercial Construction

Since all of your construction company’s payment data is already integrated into our platform, the hard part is done.

You have already told us everything about your business that a lender would need or want to know, including:

  • Your credit score
  • Who your clients are
  • Past AIA billing forms

Looking at that information, our software can:

  1. Assess all of your payment history data; and
  2. Pass this information on anonymously to our preferred lenders.

Now, they can review a higher quality, more comprehensive amount of data about your company’s financial needs from the start.

That way, when you log in to the Flexbase platform, you’ll be greeted by several different lending offers that you have prequalified for.

No stress necessary.


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8 min
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