Construction Financing Options for Industrial Projects: What You Need to Know

Whether you’re a general contractor, construction company, or developer, covering all the costs for large industrial projects is not always easy. There are a few construction financing options available depending on your needs and the lender.

If you’re exploring construction loans or need financing options for construction projects, make sure you know what’s available to you first.

What is a construction loan?

Construction loans are loans for construction projects, like large industrial projects, or other needs for general contractors and construction companies. Some companies have capital on hand to cover expensive needs, like new or extra equipment, hiring workers, or buying more supplies. However, some companies need to cover upfront costs, which is where a construction loan comes in.

How do construction loans work?

A construction loan is different from a traditional loan. Most lenders approve regular loans for a set loan amount and disburse a lump sum, requiring borrowers to repay the principal and interest rate monthly until the loan is paid in full. You’ll see this in personal loans, mortgage loans, and auto loans, to name a few.

For construction loans, lenders approve short-term amounts, depending on how much the borrower needs and what the funds will be used for. Construction loan borrowers give a down payment to secure funds — typically 20% — similar to a mortgage loan requiring a down payment on a home.

Instead of giving a lump-sum amount up-front, lenders disburse funds once certain deliverables have been met throughout the construction phase. Your lender will create a draw schedule so you know when you need to meet deadlines as the project progresses to get loan disbursements.

Types of construction financing options

Your construction financing options depend on the construction project you’re tackling. For instance, a home renovation on a current home might require a different financing option than building a dream home from the ground up. It’s important to compare different construction financing options before selecting the right one for you and your general contractor business.

Construction-only loan

A construction-only loan is a short-term loan — usually lasting about a year — that covers the construction time of a project. Interest rates tend to be higher and might have limited availability compared to other construction financing options.

Construction-to-permanent financing

Construction-to-permanent financing lets borrowers get a construction loan that can convert into a permanent mortgage. During the home construction loan portion, borrowers make interest-only payments. Later, when you convert to a traditional mortgage, you can choose between a fixed-rate or adjustable-rate home loan.

A construction-to-permanent loan is a good option for homeowners who are opting to buy a plot to build their dream home or other new construction on fresh land.

Equipment loans

If you need to purchase new equipment or repair existing equipment, explore equipment loans. Lenders fund the full amount you need to buy or fix your equipment, and then you’ll make monthly installments until your loan is paid in full.

Your equipment acts as collateral, so if you fall behind or don’t make payments, your lender could seize your equipment. However, that also means interest rates are lower for equipment loans than other construction financing options.

SBA loans

SBA loans are loans that are disbursed by traditional financial institutions but backed by the federal government. The Small Business Administration offers SBA loans with lower interest rates and longer repayment terms compared to other construction financing options.

You can use an SBA loan for many different needs. For instance, if you need to buy equipment, install software, and hire employees, you can use all your funds from an SBA loan to pay for those costs.

SBA loans take longer to get approval than other construction financing options, and you might need a stellar credit score to secure funding. Once approved, borrowers can use funds for a home construction loan or another construction-only loan, which is good news for general contractors or developers.

Business line of credit

Getting a business line of credit is one of the easiest ways to finance the cost of building a construction projection. Rather than a traditional construction loan, a business line of credit allows borrowers to use funds as needed — up to the approved amount — during the draw period. In many cases, construction costs and deliverables change throughout the project. So you may not know how much you need until the time comes when you need it.

A business line of credit is a revolving line of credit like a credit card. You can use what you need and pay interest only on the amount you borrow. While a credit card might be a good option for smaller expenses, a business line of credit might be a good option for larger construction financing, like a remodel, home renovation loan, or new home.

Other homeowner construction loans

If you’re a homeowner looking for specific construction loans, there are a few other options, including renovation loans and FHA 203(k) loans. Renovation loans are a good option if you’re purchasing a fixer-upper or planning to flip a home in a real estate purchase. FHA loans are backed by the Federal Housing Administration, or FHA, which covers purchasing and renovating a home that isn’t otherwise covered by a regular FHA home loan.

FAQs for construction financing options

What type of loan is best for construction?

Construction financing options vary based on the type of construction plans and project. You might want loan options with longer repayment terms or lenders that aren’t strict with credit approval. There are many different options to choose from, which means you should explore your options based on interest rates, eligibility, the application process, approval rate, and needs.

Do you need 20% down for a construction loan?

Some construction loans require a down payment of at least 20% to secure funding. Not all construction financing options require a down payment, so explore all your choices before completing an application.

What are the disadvantages of a construction loan?

You might face higher interest rates, shorter repayment terms, and a down payment for a construction loan compared to other types of construction financing options. Other types of financing options for construction projects — like an SBA loan or a business line of credit — don’t require a down payment.

Should I shop around for a construction loan?

Not all financial institutions offer construction loans and construction financing options. It’s a good idea to shop around and compare financing options at many different banks, credit unions, and private lenders to see what’s available and what you qualify for.

What is the APR for construction loans?

Interest rates are higher on construction loans than mortgages but lower than other financing options for construction projects. Your construction loan interest rate depends on your lender, credit score, the type of construction loan you’re applying for, the project you’re using the money for, how much you’re asking for, repayment terms, and other factors.

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