Understanding Financial Considerations

Posted on: 3 March 2018

All construction projects need financing, and banks are the most common lenders people turn to for money. However, banks have been taking a more conservative approach to making construction loans, which means you may have a hard time securing funding for your project. Here are two things a bank may take issue with your project and what you can do to improve the odds of getting approved.

It Doesn't Appear the Market Supports the Project

Banks loan money to make money. Thus, if it doesn't appear there's enough market demand for your project—meaning you may not be able to make an adequate amount of sales to pay back the money—then banks may be hesitant to approve your loan request.

For instance, one company who had planned to build a luxury condo and spa facility in Miami canceled the project because it was only able to sell about 15 percent of the planned homes. One reason cited for the slow sales was the oversaturation of condos in the Miami luxury market.

Any lender you submit your application to will look at market factors to help it determine how risky it will be to lend money to you. If there are a number of red flags indicating the venture may fail (e.g., not enough buyers in the market, oversaturation), then the bank will be reluctant to approve your company for the loan.

Thus, you need to be sure the positive aspects of your project overshadow the negative ones. If the bank is concerned there are already too many hotels in the area, point out how your hotel will meet the needs of an underserved market that increases the likelihood the building will make the necessary sales, for instance.

The Bank Has Too Many of One Type of Loan

Commercial construction loans are divided into two categories: short-term financing for the construction and lease phase and long-term financing for when the project is mostly built, and the construction company is focused on filling vacancies. At any point, a bank will have a certain percentage of each type of loan on their books. If the number of loans hits or exceeds their risk point, they'll stop accepting applications for those types of loans until borrowers start paying.

This challenge is difficult to overcome because the bank may or may not tell you that's why they're declining your application. If a bank does indicate this is the reason, see if there are other loan products you may qualify for that help you get the financing you need for your current project. For instance, you could pull equity out of a different product to help fund your needs.

Otherwise, it's best to shop around and even consider alternative sources of financing if you keep running into the same issue with traditional lenders. To learn more about the different commercial construction loan options available, contact a local lender.