Top Mistakes Small Business Owners Make With New Construction Lenders

Mistake 1: Underbudgeting

Construction projects require detailed budgets. But sometimes those budgets are way off and inaccurate. A surge in prices due to inflation can threaten any budget's effectiveness. A delay can prove to be costly. Labor costs are unavoidable and can significantly impact the bottom line.

Many small business owners don't account for these extra expenses, which can derail the project quickly. While you don't want to overborrow, planning around contingencies and having a buffer can help you avoid this mistake. Before you even start researching new construction lenders, come up with a budget and consider adding 10% to 20% for contingencies.

Mistake 2: Not Vetting New Construction Lenders

You can get construction financing from a range of places. Whether you go to a traditional bank, credit union, or use an online lender or a construction-focused lender, you must do your due diligence.

It's a key part of the process that some small business owners overlook. You might verify the credentials of a general contractor you plan on working with, but don't do the same with your lender.

It's easy to get lured in by competitive interest rates, but there are many other things to consider, including:

• Repayment terms
• Industry experience
• Draw schedule
• Additional fees
• Reputation
• Customer satisfaction

 When comparing lenders, look at each company's Better Business Bureau rating and complaints, as well as Trustpilot reviews.

To take a step further, you can also use the company name as a keyword and search on social media platforms for more information. Additionally, you can use search engines to see if there are any recent and relevant lawsuits.

Mistake 3: Not Understanding the Loan Terms

Working with new construction lenders can be a way to secure financing for your project. But getting financing isn't just about the capital you get. It's about how the loan is structured, how long you have to repay the loan, the draw schedule milestones, and interest rates.

Not understanding the loan terms can be a costly mistake and lead to surprises down the road. First of all, construction loans work very differently than traditional mortgages.

Construction-only loans may provide capital for the construction phase. During that time, you may benefit from interest-only payments. But funds may only be released on a specific draw schedule set by the lender.

But once the project is complete, you may be on the hook for the remaining balance. As a result, this could mean making a balloon payment or refinancing to get new terms.

Construction-to-permanent financing has a single closing, which may help reduce closing costs.

You can get the funds for the construction project and pay only the interest on the loan. After construction, the loan converts to a permanent mortgage, extending the repayment and making monthly payments more manageable.

In either case, it's important to understand how payments will affect your overall cash flow.

You might be fine during the interest-only period but be in for a shock when you need to make a balloon payment or pay the principal and interest with a permanent mortgage.

Mistake 4: Misaligned Draw Schedules

Construction loans work very differently than many other types of loans. Instead of receiving a lump sum, new construction lenders release funds in "draws" after certain milestones are met.

A mistake that small business owners make is not looking at the draw schedule and making sure it works for their needs.

Misaligned draw schedules can mean costly delays and missed deadlines. Timing matters, as your general contractors need to be paid, and materials and supplies must be purchased.

It's essential to understand how the draw schedule works and how quickly funds are released after meeting certain milestones. When researching lenders, understand what milestones trigger each draw, who verifies the work, and how long approval takes.

Ask about potential inspections and draw fees and what might happen if construction is behind schedule. To avoid cash flow issues, the draw schedule on the loan must align with your construction project needs.

Mistake 5: Not Preparing Supporting Documentation

You might need funding right away to kick off your project. But that doesn’t mean you should rush when applying for construction financing. A mistake that’s easy to make is not preparing supporting documentation ahead of time. That can weaken your application or lengthen the processing time due to inadequate information.

New construction lenders will evaluate both your construction project and your ability to repay the loan. As part of that, they will ask for supporting documentation. Getting documents ready ahead of time can help streamline the process and strengthen your application.

Some documents may include:

• Business plan
• Bank statements

• Personal and business tax returns

• Debt obligations
• Permits or licenses
• Construction timeline
• Detailed construction plans
• Estimated project budget

If you have missing, incomplete, or inconsistent documentation it can slow down the underwriting process. Inconsistencies between documents — such as revenue figures that don’t match across tax returns and bank statements — can raise red flags during underwriting.

Mistake 6: Focusing on Approval Over Financing That Fits

If you need construction financing to help build a new office space or investment property, it’s natural to focus on approval. While getting approved for a construction loan is important, it’s a means to an end. Ultimately, you need financing that actually fits your project timeline, supports your cash flow, and aligns with your repayment capacity.

Avoid simply accepting the first offer that’s available. Instead, go through the process of comparing multiple new construction lenders. Doing so will help you get an idea of what terms you qualify for, and which lenders and type of financing may work best for your business goals.

Make sure to read the full loan agreement, including the terms and conditions. If you have questions, get answers before signing the agreement. For additional support, consider hiring a vetted attorney to help you understand the complexity of the loan documents.

How to Compare the Best Construction Loan Lenders

Finding the best construction loan lenders takes some research. It’s important to note that there isn’t a universal best lender, and it depends highly on many different factors, including:

• Type of project
• Estimated project timeline
• Loan amount
• Location
• Industry experience
• Preferred repayment structure
• Financial profile

When researching new construction lenders, consider the following to get an apples-to-apples comparison.

• Interest rates
• Down payment requirements

• Repayment terms

• Fees
• Draw schedule and process
• Funding timeline
• Customer support options

If possible, see if you can obtain quotes from various lenders to confidently evaluate offers and find the best option for your project and specific circumstances. In some cases, you may be able to get pre-approved.

What Do New Construction Loan Lenders Look for in a Borrower?

Construction loans typically carry more risk. As a result, new construction lenders evaluate many different factors to determine if a borrower qualifies. In general, lenders review the following when applying for a construction loan:

• Proposed project budget
• Repayment ability
• Down payment amount
• Construction timeline
• Building plans
• General contractor information
• Strong cash reserves
• Solid supporting documentation

While you want to get the capital you need to build, lenders want to know that you have the means to repay what you borrow. You can strengthen your application by improving your credit profile, increasing your down payment amount, and having comprehensive supporting documents.

Final Thoughts

Getting a new construction loan is more than just getting the capital you need to begin your project. It’s about finding the right lending partner and avoiding major mistakes that can hinder progress and end up costing you in the long run. That means understanding your budget, knowing your loan terms and draw schedule, and the repayment structure.

When comparing new construction lenders, go beyond comparing rates. Make sure the draw schedule and types of financing available match your project’s timeline and ultimately support your cash flow, rather than hinder it.