5 Negotiating Tips for Construction Loan Financing

June 27, 2017 Company News

If you’re in the commercial real estate business, you know it is extremely crucial to attract funding to your operations and sustain your cashflow. In order to grow your construction business steadily and expand your operations, you must explore opportunities to get construction loan financing. As a contractor, your options include a line of credit, bonding, and bank loans. However, you should be familiar with the best practices of negotiating a construction loan, which can help you get financing for your construction project seamlessly.

The National Association of Home Builders (NAHB)  has advised real estate businesses to keep the following best practices in mind while approaching a lender for construction loan financing.

Look for a Flexible Lender

There are many lending institutions that support real estate businesses in financing their projects. However, in order to optimize your success in getting the construction loan, you need to look for a lender that is fully conversant with your industry and is flexible enough to match your criteria. Often times, small real estate businesses fail to meet the stringent eligibility criteria of lenders. Therefore, finding the right lender who understands your industry and your project requirements will help you boost your chances of getting the loan quickly.

According to Nerdwallet, small real estate companies looking for commercial real estate loans, for example, can try online lenders instead of traditional banks. Online lenders such as SmartBiz, Funding Cycle, and Bond Street have less strict eligibility requirements and faster time for funding. Even if it costs a bit extra to get a loan from them, it’s fast and convenient.

Establish Credibility Early On

Your prospective lenders have every reason to be skeptical about your eligibility criteria. Therefore, it’s your responsibility to establish your credibility early on. Provide your potential lenders with requisite documents such as financial statements (current and previous years), a list and photos of projects (current and past), tax returns for the past three years, your company’s organizational chart, an inventory list of your company’s requirement, references from satisfied customers and subcontractors with whom you share a positive relationship.

Moreover, demonstrate a high level of professionalism while meeting your lenders or giving presentations. Ask for positive recommendations from your contractor friends, insurance agents, builders associations and even competitors, if possible. All these will help you establish a solid credibility to get your loan application approved.

Come Fully Prepared for Negotiations

Bankers and lenders offering commercial construction loan financing are often very strict about the documents and legal processes during the negotiation. When the real estate marketing is particularly dull, like it was in 2009, your prospective lenders could also be very unyielding, forcing you to accept legal and business risks that you would have otherwise resisted. Therefore, in order to make your negotiation less daunting, you should put together a comprehensive amount of information about your business. Typically, the information should include updated and easy-to-understand financials, a marketing plan for each project that needs financing, marketing collateral material, and an exact estimate of the project costs.

Negotiate Like a Pro

Even as your documents are strong, you still need to convince your prospective lenders about your eligibility especially when the loan amount is particularly higher. This is exactly where your knowledge and negotiation skills will put you in a good position. The NAHB recommends learning local terms and conditions in the banking community and being conversant with the technicalities of your application from the lender’s standpoint. Knowing the LTV (Loan to Value) Ratio of your application and its range acceptable to your prospective lender, for example, can put your case in a very strong position. Here is a great resource to learn the key terms used in the real estate financing.

Learn about Banker’s Capabilities (and Limitations)

In some cases, getting your loan application approved may go beyond strong documentation process or negotiation skills. There are many factors that may affect the approval of your construction loan request. Some of the reasons that usually delay the approval process may include regulations, requirements, and internal management issues. Under such a scenario, you should try to understand the capability, strengths, and limitations of the loan officer. This will help you either work out a solution or simply move on to another prospective lender. Understanding the potential bottlenecks your loan approval process early on will help you prepare yourself better for negotiation.

Final Thoughts

Hunting for construction loan financing can be complex and taxing. Therefore, it requires diligent preparation, careful analysis of eligibility criteria and compelling negotiation skills to boost your chances of success.