With governments around the globe slashing interest rates and mortgage rates sitting at historical lows, the construction market will probably keep booming for a while as the world progressively recovers from the economic fallout caused by the pandemic.
In this particular environment, construction projects should have higher chances of thriving as customers find it cheaper – possibly than ever – to acquire properties due to lower borrowing costs.
If you have already identified opportunities in this particular market and you are looking for ways to finance your project, the following article will provide further information about commercial construction loan rates offered by providers like Camino Financial along with other interesting information on this topic to help you out in picking the best loan for your development.
Main advantages of commercial construction loans
Commercial construction loans are financing instruments designed to help real estate builders in developing their projects regardless of their size.
In a typical scenario, a builder will seek to finance a portion of its project with the down payments obtained from off-plan buyers while also putting down some equity from the company to further strengthen the project’s capital.
Meanwhile, the remaining portion of the project’s total cost can be financed by using a construction loan.
Given that the amount of debt required to finance developments is typically large, shopping around for the best commercial construction loans rates to pick the least expensive option can end up saving the builder thousands of dollars in interest expenses.
Now, why would a builder use one of these loans instead of a regular loan?
One of the many advantages of using commercial construction loans when building a new development is that the lender commonly has a deeper understanding about how project financing works, which increases the likelihood that your loan application will be approved.
Moreover, commercial construction loans rates are typically lower than those of a regular loan – especially if the builder pledges the land or the project itself as collateral.
Additionally, most countries have entities that can serve as guarantors for at least a portion of the loan to further increase the chances of getting your project’s loan application approved.
Average commercial construction loans rates
Depending on the lender and the program or product for which the borrower applies for, commercial construction loans rates can go from 2% to 10%.
In the United States, these alternatives include loans backed by the US Small Business Administration (SBA) – with rates varying from 2.2% to 11.25% – and traditional bank loans, for which rates start at 5% typically.
Meanwhile, commercial construction loans rates for hard-money loans (HML), which are typically considered the most expensive option among all, can go from 10% to 18%.
In this context, the rate that suits your project would be the one that allows you to achieve your expected level of profitability while keeping your risks in check.
Recommendations for analyzing commercial construction loans rates
Project financing is an important area that developers should understand or they should find proper counsel to make sure the financial side of the development is well taken care of.
In this regard, picking among the different alternatives when getting a commercial construction loan will involve a careful evaluation of the impact that different commercial construction loans rates will have on the project’s profitability and risk.
A rate that is too low might sound like the best choice, but the amount available from low-rate alternatives is often limited.
Meanwhile, more expensive alternatives can increase the project’s risk or significantly diminish its profitability.
To help you in making a much more informed decision when picking your mix of commercial construction loans, here are a few recommendations:
1. Use conservative assumptions when forecasting your cash flow
Even the most promising projects can face unexpected obstacles and hidden costs and you should be prepared for that. One way to do this is to operate assuming that your worst-case scenario will come true.
In most financial models, these scenarios involve lower-than-expected revenues and higher-than-expected costs and under those particular circumstances you should still be able to pay the installments of your commercial construction loan on time.
2. Use as much as you can from low-cost sources
The more funds you can secure through low-cost sources, like government-backed loans, the lower your monthly installments will be, which will reduce the overall risk of your project.
Try to incorporate as many of these sources as you can and keep high-cost borrowings in check to avoid putting too much pressure on your cash flow.
Bottom line
You probably know much more about commercial construction loans rates than you did before and this should help you in securing the best loan offering out there.
In case you are already looking, you can visit the website of Camino Financial, they offer online commercial construction loans at competitive rates. The application process takes a few minutes and the requirements and paperwork involved is as simple as it can be.