How Lenders Assess Risk for Industrial Construction Loans

Borrowing for industrial construction financing means you must understand how lenders evaluate potential loan borrowers. Construction business financing differs from personal lending, so you need to know how to get approved before completing an application.

If you’re a general contractor, subcontractor, architect, or work in commercial real estate, it’s important to figure out how to get funding for construction business so you never fall behind on construction projects. Without construction lending, you’re on the hook for paying out of pocket for your construction projects, and some construction costs are too costly to pay upfront. Here’s what you need to know about industrial construction financing and getting small business loans for construction.

What Is Industrial Construction Financing?

Industrial construction financing depends on the type of construction project you’re looking to finance. Every lender has different requirements, so each underwriting process might look different.

As there are different types of industrial construction financing, construction loan disbursements look different depending on the type of funding, construction project, lender, and more.

Most of the time, construction loans are short-term construction business financing options. The approved loan amount depends on a few different factors.

What Lenders Evaluate for Construction Business Financing

Whether you go to a bank, credit union, or another type of construction loan lender, there are a few things lenders are looking at when it comes to assessing your construction project, including:

• The construction budget
• Risk management
• Estimated project completion
• Expected project costs
• Your company’s financial stability
• Your personal credit score and credit history
• Your company’s credit score and credit history

Other factors include current market conditions, how long your company has been in business, and more.

Risk assessment is different for each project, company, and loan. When lenders are underwriting loans, construction projects are evaluated on a case-by-case basis, even if there are certain thresholds each project has to meet set by the lender.

How Industrial Construction Financing Works

Before you take out small business loans for construction, make sure you understand how funding for construction business works.

Regular construction loans are short-term, interest-only loans that cover the cost of the construction of building a home. The terms are usually about a year, and for homeowners who get construction loans to build a home, some construction loans convert to a traditional mortgage. Not all industrial construction financing focuses on home construction. Some small business loans for construction are for commercial construction.

While traditional loans give a lump-sum payment, industrial construction financing works more like a revolving line of credit, like a credit card. Both commercial and residential construction business financing use a draw schedule to disburse payments when you meet certain milestones throughout the construction process.

Different lenders have different standards for their draw schedule requirements, but some require an inspector to verify milestones get met before approving more financing.

How Lenders Assess Risk for Industrial Construction Financing

Not all lenders have the same requirements, and not all loans have the same eligibility standards. With a few different types of industrial construction financing, you may have to provide other supporting documents in your loan application, depending on which kind of construction business financing you’re looking for.

SBA Loans

The Small Business Administration (SBA) offers or backs various loans supporting construction business funding.

SBA 7(a) Loan

This loan program allows you to borrow up to $5 million with either fixed or variable interest rates. Small business loans for construction must show a financial need to receive funds backed by the SBA. To be eligible, businesses must:

• Be for-profit, operating in the U.S.
• Be considered a small business as defined by the SBA.
• Show creditworthiness and an ability to repay the loan responsibly.

Loan terms are as long as 25 years, but real estate finances are 10 years or less. You can use these funds for working capital, purchasing equipment, or improving already-owned real estate.

SBA 504 Loan

This loan program lets you borrow up to $5.5 million to:

• Purchase land or buildings
• Construct new buildings
• Build or purchase new facilities
• Buy new facilities or equipment
• Update existing facilities

You can’t use these funds as working capital or invest in real estate like you can with a 7(a) loan. Fixed interest rates are on terms ranging from 10 to 25-year terms. While the SBA backs these loans, you’ll need to apply for a loan through a Certified Development Company (CDC) that is authorized to issue 504 loans.

Microloans

Small businesses can borrow up to $50,000 to cover working capital and pay for inventory, supplies, furniture, fixtures, equipment, and machinery. However, you can’t use it to buy real estate or pay off existing debt.

Interest rates vary based on lender, but range between 8% and 13%. The maximum repayment term is seven years. How much you get approved for depends on your financial institution, the project budget, your credit score and history, and other factors.

Bank Loans

Aside from the loan administration, you can use private lenders for construction lending. There’s no set standard on how construction lenders are evaluating borrowers, but many are looking at:

• Cash flow
• Your borrowing track record
• Construction loan risk
• Your company’s balance sheet
• The feasibility of the project
• Risk mitigation
• Potential draw requests

And other factors.

Before you complete a loan application, do your due diligence and shop around. Compare offers from different lenders to see which industrial construction financing options are best for you.

Conclusion

To secure industrial construction financing, it requires more than just filling out an application. It demands careful preparation, financial transparency, and a strong understanding of what lenders are looking for.

Whether you’re applying for an SBA loan, a bank loan, or a microloan, it is important to show your company’s financial stability, managing the risks, and presenting a clear project plan. These will help you to secure the right financing and increase your chances of approval.

Construction business financing is an essential tool for keeping projects on track without draining your cash reserves. Hence, search your options, understand lender’s expectations, and choose the right financing solution. This will ensure to position your construction business for steady growth and long-term success.

FAQs About Industrial Construction Financing

What does the bank need for a construction loan?

When you’re going through the loan process, you’ll need to provide a few different supporting loan documents with your application. You’ll need to show a detailed construction project, a balance sheet, your risk and any liability as a business. In some cases, you might need to pull your personal credit score and history in addition to your business credit score and history.

Do you pay during a construction loan?

Rather than a lump-sum payment, industrial construction financing pays out based on a draw schedule. You’ll update your lender on the construction progress and your lender makes periodic payouts as you hit specific goals. You only make payments on what you borrow.

How long are construction loan terms?

Industrial construction financing terms vary based on your lender and the type of loan you borrow. Typical small business loans for construction are short, ranging from a few months to up to two years. However, some loan terms can go up to a couple of decades, depending on your lender and the type of loan you get.

What is the monthly payment on a construction loan?

Payments on a construction loan are only on what you borrow. As construction progresses and you get regular payouts, monthly payments will increase.

What factors do lenders evaluate when approving industrial construction loans?

While approving industrial construction loans, lenders typically assess your project budget, financial stability, risk management strategies, and credit history. They also review your projected completion timeline and current market conditions.

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