Commercial construction projects sure have their fair share of advantages and challenges. It can be exciting and profitable, but it can also be challenging to manage construction costs. For the success of any project, staying on budget is essential.
But before investing in commercial property loans, here are a few budgeting and financing tips to help you feel confident in your ability to keep your project loans under control.
1. Plan Your Budget Carefully
The first step in managing commercial construction loans is to have a detailed budget. A budget is a roadmap that will help you stay on track financially. Here’s how to create a budget:
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List All Expenses: Start by listing all the costs associated with your project, including construction materials, labour, permits, fees, and any other expenses.
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Estimate Costs: Research and get estimates for each item on your list. Try to be as accurate as possible. It’s always better to overestimate than underestimate.
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Contingency Fund: Add a contingency or emergency fund to your budget for unexpected expenses, which is usually 10-15% of your total budget.
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Set Priorities: Prioritise your expenses to know which ones are essential and which can be adjusted if needed.
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Create a Timeline: Attach timelines to your expenses for when will you need to pay for each item. This will help you plan your loan disbursements.
2. Choose the Right Loan Type
Commercial property loans come in different types. It’s essential to choose the one that fits your project best:
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Construction-Only Loan: This loan covers the construction phase and is usually short-term. You’ll need to pay it off once the building is complete.
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Construction-to-Permanent Loan: This loan covers both construction and long-term financing to save you money on closing costs.
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SBA 504 Loan: If you meet the Small Business Administration’s criteria, this loan can be an excellent option with lower down payments and favourable terms.
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Traditional Bank Loans: These loans come from banks with varying terms and rates. Look out for the best deal.
3. Understand Loan Disbursements
Most commercial loans in Melbourne are not given to you all at once. Instead, they are disbursed in stages as your project progresses. It’s essential to understand how this process works:
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Draw Schedule: Your lender will have a draw schedule that outlines when they’ll release funds. You only need to make sure that it aligns with your project timeline.
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Inspections: A lender often sends an inspector to check progress before releasing funds for each stage. Be prepared for these inspections.
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Documentation: Keep thorough records of your expenses and progress to satisfy the lender’s requirements for disbursing funds.
4. Keep an Eye on the Costs
During construction, it’s easy for costs to increase rapidly. Here are some tips to manage expenses effectively:
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Regular Monitoring: Keep a close eye on your budget and expenses. Make adjustments if necessary.
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Competitive Bidding: Get multiple quotes from contractors and suppliers to ensure you get the best prices.
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Quality vs. Cost: Balance the quality of materials and workmanship with your budget. Cutting corners now might cost you more in the long run.
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Change Orders: Be cautious with change orders. Unexpected costs can be added to your project.
5. Be Prepared for Loan Repayments
Remember that your commercial construction loan needs to be repaid. Here’s how to prepare for that:
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Permanent Financing: If you have a construction-to-permanent loan, make sure you have a plan to secure long-term financing once the project is complete.
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Cash Flow: Ensure your project generates enough income to cover loan payments and operational expenses.
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Refinancing: Explore the possibility of refinancing your loan for better terms after construction is finished.
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Budget for Repayment: Include loan repayment in your budget from the beginning. Understand the monthly or annual payments and how they fit into your financial plan.
The Bottom Line
Managing a commercial construction loan needs careful planning and financial discipline. Always get advice from commercial lawyers when unsure. But by following the above steps, you will be well on your way to being able to complete your project efficiently while staying within the budget.
