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Should you consider a commercial construction loan?

Posted By Julie Smith, Horizon Community Bank, Wednesday, February 22, 2017

Your business has grown, and it might be time to move into your own building. You’ve looked at commercial real estate for sale or lease, but just haven’t found what you’re looking for. The location or size is wrong, its age requires costly remodeling, or some other feature excludes every property you’ve seen.

Should you build?

Learning about the process, securing a loan and other basic details might help you decide.


There are many ways to educate yourself about commercial construction loans, but the fastest path to a smart answer is a straight line to experts who deal with this every day. Obtaining their help to answer these three questions is where you begin.

1. Can you qualify for funding? Meet with a commercial banker to discuss financing. Traditional partners include a commercial builder, a commercial real estate agent, a real estate attorney and a banker. We suggest beginning with the banker to be sure you qualify for the necessary funding before you spend too much time pursuing construction or shopping for land. It gives you a solid understanding of payments you can afford, how much of cash you’ll need for the down payment, and other important financial details.

According to (and a sentiment we agree with), “construction or development loans are almost always [financed by] local community or regional banks. Historically this was due to bank regulation that restricted trade areas for lending.”

 Using a community bank also gives you access to a commercial banker with strong local relationships and a solid understanding of the local market. This can be incredibly helpful when selecting other construction partners. The banker often knows builders personally or by reputation, and can point you in the right direction with options you might not have considered. 

 The right banker can also help you with customized financing, since you won’t need just one loan. You’ll need to understand the kind of funding your cash flow can support, and obtain a package loan that includes short-term (mini-perm) funding to purchase land and fund building costs, then a long-term mortgage loan to pay it off at a lower interest rate. Other loans might be included in your package, which the banker will help you understand. It’s a complex process. 

2. How long will it take? Put together a realistic timeline from funding through move in. Building from the ground up is a labor-intensive, LONG process. Not every business can afford to wait a year or longer to move in.

Sitting down to think through the process and how long a build takes from start-to-finish is sobering. Is waiting twelve or eighteen months a problem for business operations? Do you have that kind of time?

Talking this over over with your construction partners, along with the actual timeline of similar local projects, may be just the realization needed to make a decision that’s right for you.

3. Is land available in the location you prefer? Arizona is growing quickly, and its major cities are challenged with rapidly disappearing empty lots for sale. It’s harder and harder to find land that isn’t already occupied. Depending on budget, some are even bulldozing older buildings to make room for new construction in premier locations. Commercial builders have insight into available land, as do commercial real estate agents. Once you have discussed financing and are qualified to secure funding, it’s time to start looking at real estate options.

Figuring out if the right piece of property is available or not can swiftly guide your decision to build.


Funding for a commercial loan can differ based on the use of the building. If it’s an investment and you’ll be leasing space, terms are different than an owner-occupied loan. A banker considers the property’s ability to generate cash flow, instead of just overall cash flow for the business, and the investor’s experience and ability to manage the property. If the property is to be owner-occupied, a Small Business Administration (SBA) loan may also be considered.

For the sake of this article, let’s assume the loan is for an owner-occupied building. Before a banker begins helping you create a pro-forma document detailing the construction project, budget, market conditions, builder/contractor information, financials and credit history, they will discuss the purpose and goals of the project with you, and do a preliminary screening of your creditworthiness. From the preliminary information provided, the bank will decide if the proposed transaction meets its criteria for a qualified transaction. If the initial decision is to move forward, a term sheet is provided outlining details of the proposed loan.

Then the real work begins. The business owner will be asked to provide common financials, such as personal tax returns, profit and loss statements for the business, construction cost estimates and full project plans, and more. The banker will work with you to complete the process, which is extremely detailed.

Once loan underwriting is complete, the loan shifts into the closing process. It’s complex, with a vast amount of paperwork and processes required to protect the banker and borrower. Because the construction loan is funded in stages based on project completion, the borrower won’t receive a check and be on their way.  Both the borrower and the developer will work closely with someone at the bank to follow bank policies and procedures in accordance with the loan terms.


Because of the time involved and how closely the relationships must work together, choosing the right combination of banker and builder is essential. You’re virtually married to them to them for years, in constant communication almost every single day. Their experience, skills and connections make all the difference

It’s also important to understand the time commitment commercial construction requires before you commit to the project. It’s not just about how many months it takes to complete, but how much of your time the project will require.

Business owners are busy and construction projects have a million and one details demanding attention. Sitting down to think through the process and how long a build takes from start-to-finish is sobering. It’s virtually a full-time job on its own. Do you have that kind of time? Can you afford the intangible “cost” of diverting attention from your business to the construction process? These are worth consideration.

If this isn’t something a borrower can manage, perhaps it’s better to purchase and retrofit an existing building, rather than building.

Commercial construction is an intimidating venture for beginners. If you have questions about funding, qualifications or the process, Horizon Community Bank is here for you with a free, no-obligation consultation. Contact us today, we’re pleased to help. You can also reach out to us on our Facebook page

Tags:  business  business loan  commercial real estate  financing  small business 

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Is it time for a small business loan?

Posted By Julie Smith, Horizon Community Bank, Tuesday, September 13, 2016

It’s time to invest in your business assets, be it a better location, new talent or updated machinery… and you’ve toyed with the idea of a business loan.

You’ve probably explored a million and one funding options, knowing funds from family, friends and credit cards isn’t an effective solution. But still, you hesitate taking on debt.

Is it time? Are you ready?

Let’s explore some possibilities.


An honest evaluation of your business will help you decide if taking on debt is the right “next step” or something that isn’t in your best interests.

A few questions to consider include:

  1. Is your business profitable or operating at a loss?
  2. Are you borrowing funds to remain in business?
  3. Do you want loan funds for a want or a need?
  4. Do you have a strong business plan already written?
  5. What kind of personal AND business credit history do you have?
  6. How would you spend the borrowed funds?
  7. Will the investment directly impact revenue? Does that matter?
  8. Can you afford loan payments, even if accounts receivables were significantly late or if you lost a major client?
  9. What assets do you have available that a bank would consider as collateral?
  10. How will the borrowed funds provide a positive ROI or increase the value of your business?


Business finance is complicated. Because there are dozens of types of business loans–short-term loans to cover temporary cash flow problems, equipment purchase loans, commercial mortgage loans–it’s important to understand the type of loan you need. After all, the “loan du jour” at the closest branch of a big bank might not be the best choice.

Once you understand exactly what type of loan you need, it’s easier to consider alternative funding options for that loan.

Not all banks or online lenders provide all types of loans. As a consumer, for example, you wouldn’t pay for a new car with a second mortgage on your home or a credit card – business loans are similar. You also wouldn’t go to a bank that specializes in consumer lending for a commercial loan.

There are dozens of types of loans, and you’ll want to match the need with the right lender, type of loans and terms you can afford.

It helps to discuss these things with a qualified banker (see our recent article on Right Financing) or spend time educating yourself online about options.

Looking for more information on smart reasons to get a business loan? We like this article on

If you’ve done your research and explored your options, but still feel uncertain it’s the right move, all is not lost. You have several other options.


To pay for new assets without taking on debt, the most conservative option is to take it slow and save your profits until you can afford the purchase, or wait until profits can consistently support an increase in payroll or accounts payable demands.

This zero-risk choice is safe, but the time required might be impractical or even harmful to your business.


If you’d like to move a little faster, a combination tactic might serve you well: saving until you have a significant portion of the funds you need, then financing the rest. After all, who says you need to borrow 100% of the amount you need, right?

Just remember to keep enough cash on hand for emergency situations, such as a shortfall with payroll, or covering slow account receivables.


Once you’ve evaluated the options and you start to consider taking a loan, it’s always good to go back to the core of your business before you move forward. Review your business plan and improve it. Include financial projections for the next 3-5 years and make sure everything is in order.

By doing that, you will get a clearer vision of your future goals and will be able to make a more informed decision. Having everything organized in one place will also help your case in the bank in case you do decide to take out the loan.

Ready to talk to a banker? Give us a call today and schedule an appointment with a small business specialist. We’re here for you, no matter what’s on your horizon.

Tags:  arizona small business  business loan  small business 

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