SBA Construction Loan Tips for Small Business Owners

While the SBA construction loan process may seem daunting, small business owners who’ve navigated it will tell you that it’s well worth the effort. That’s because an SBA construction loan offers competitive fixed interest rates, lower down-payment requirements, and longer repayment terms. Which will allow you to invest more time and money into your business’s growth.

Here are some top tips to make the SBA construction loan process go more smoothly, whether you’re using (or are interested in) an SBA 7(a) loan or an SBA 504 loan for your project.

Tips for a successful SBA construction loan process

The SBA construction loan process is thorough because the projects they fund – including commercial real estate construction, acquisition, and renovation – are inherently complex. These tips will make the loan process easier for you and help your overall project run more smoothly:

Work with a general contractor (GC) who is specifically experienced in your type of construction or renovation project

There are GCs who specialize in different types of projects, such as hotels, manufacturing facilities, retail, and restaurants, for example. The right GC for your job can have an enormous impact on the outcome because they’ll know everything you need, from permits to finishes. When deciding on a GC, make sure to do your due diligence: Check their references and reviews, then visit related projects to see their finished work.

Thoroughly review your plans with your GC to ensure that all possible expenses have been accounted for

A GC who is experienced in your kind of project will have a good understanding of the elements needed to complete the project. However, you know your business best, so make sure that your cost structure plans include everything you need for your project. This includes HVAC, electrical and plumbing; finishing work; landscaping and hardscaping; furniture, fixtures, and equipment; signage; security, and anything else you can think of that is needed for your project to be completed.

“Fixed-price” or “cost-plus”? Know the terms of your project’s contract

As their names imply, there are generally two types of contracts used for construction projects. “Fixed-price” contracts are just that: You’re given a set, all-in price for a project. A “cost-plus” contract includes costs broken down by materials, labor, overhead, profit margin, and ancillary items, such as procuring permits or required environmental reviews.

Each contract type has pros and cons:

  • For a cost-plus contract, you’ll only pay the actual costs plus an agreed profit margin, but if prices for materials change substantially over the course of your project (such as the recent significant increases in the cost of lumber), then your budget may be thrown off course. One way to protect against this is to set a project maximum.
  • For a fixed-price contract, you’ll know in advance what the final cost should be, but if your GC’s team runs into unexpected challenges or other increases in costs, they may cut corners to meet the project budget. One way to protect against this is to know in advance which aspects of your project you can reduce or eliminate, should you need to cut costs to stay within budget and still get the high-quality outcome you want.

Make sure to have plenty of cash reserves

Although renovation projects are typically easier to budget and may have fewer issues than ground-up construction, both types of projects need sufficient cash reserves. You’ll want to create a plan for how you’ll cover expenses until your loan is disbursed, as well as for expenses that may pop up during the project. Also, be aware that the bank partner for your SBA 504 loan may require additional collateral from you during construction.

Open and use a specific bank account that’s dedicated to the project

Before your project gets underway, open a bank account that is dedicated to the project. Immediately deposit your required owner equity and leave it there for project use. Make sure you don’t use it for other expenses, like day-to-day operations. It’s also important to keep track of where the funds came from, such as if they came from personal accounts or the operating account of your business. Keeping good records will make it much easier to prove that owner-equity funds weren’t borrowed. Also, it’ll make it easier for you to track expenses and organize invoices by vendor for payment.

Pursuit can help you bridge funding gaps and get your project to a successful completion

Every day, Pursuit helps small business owners by providing funding solutions that meet their needs and goals. We offer SBA 7(a) and SBA 504 loan options for commercial real estate projects and have a range of loan options that can help you get the funding you need to see your project through. Contact us today to learn more.

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