What Is A Commercial Construction Loan? Types, Tips & More

A commercial development loan, also known as a commercial construction loan, is a short-term financing solution designed to fund the construction, expansion, or major renovation of commercial properties.

Unlike standard commercial mortgages used to purchase or refinance existing buildings, these loans cover both the cost of acquiring the property (if applicable) and the development work. 

Funds are typically released in stages as the project progresses, ensuring developers can manage cash flow effectively while minimising financial risk.

Explore commercial construction finance in greater detail below.

What is a commercial construction loan?

Unlike traditional property loans, commercial construction loans work on a drawdown basis. Instead of receiving a full loan amount upfront, developers receive funding in stages, aligned with project milestones.

Key Features:

• Loan Term & Repayment: Construction loans generally have terms of 12 to 36 months, with repayment due upon project completion or refinancing into a long-term mortgage. In contrast, commercial mortgages have much longer terms, often 10 to 25 years, and are designed for income-generating properties rather than ongoing construction.
• Risk Assessment: Lenders evaluate different criteria compared to standard commercial mortgages. While income potential is still a factor, the primary focus is on the project's exit strategy—will the property be sold, leased, or occupied by the borrower? Lenders assess whether tenants or buyers are secured in advance, or if the borrower has the means to refinance.
• Collateral & Security: The land and property under development serve as security, and lenders may require additional guarantees. Unlike a standard commercial mortgage, where the completed property’s rental income is the key security factor, construction loans require closer monitoring to ensure funds are used appropriately and the project remains on track.
• Larger Professional Team Involvement: A construction loan involves a broader professional team, including architects, contractors, and project managers. One key figure is the Monitoring Surveyor, who plays a crucial role in assessing progress and approving staged drawdowns. This ensures the lender releases funds only as work is completed, mitigating risk.
• These distinctions highlight why construction loans require a more complex underwriting process compared to standard commercial mortgages, with lenders placing greater emphasis on project feasibility and exit strategy rather than solely on current rental income.

Common Uses of Commercial Construction Loans

Businesses and developers use commercial construction loans for a variety of projects, including:

• Office buildings: From small business offices to multi-storey corporate headquarters, these loans help finance new builds and large-scale refurbishments.
• Retail units and shopping centres: Whether it's a single high-street shop or a large shopping mall, commercial construction loans provide the capital needed to bring retail spaces to life.
• Industrial warehouses: As e-commerce continues to grow, so does the demand for warehouses and distribution centres. Developers rely on construction financing to build or expand these essential facilities.
• Mixed-use developments: Combining residential, retail, and office space into a single development is increasingly popular, and commercial construction loans help fund these complex projects.
• Hospitality and leisure facilities: Hotels, resorts, gyms, and other hospitality ventures require significant investment, and construction loans provide tailored funding solutions for these large-scale builds.

Since these projects require significant capital, commercial construction loans are structured differently from standard mortgages. They are often disbursed in drawdowns, meaning funds are released in stages as the construction progresses, rather than as a lump sum.

How does a commercial construction loan work?

A commercial construction loan follows the same general process as a development loan but comes with additional complexities. Lenders assess these projects more cautiously, as they are often harder to value due to fewer comparable properties.

Who Takes Out a Commercial Construction Loan?

There are typically two types of borrowers:

1. Property Developers: These borrowers identify opportunities to build and sell commercial properties to businesses or investors. Their primary considerations include:
   • Market demand: Is there a need for this type of commercial space?
   • Exit strategy: Is the property pre-sold or pre-let, or will they sell upon completion?
   • Build costs vs. end value: Ensuring the profit margin justifies the development risks.
   • Risks: If the commercial property does not attract buyers or tenants quickly, the developer may struggle to exit the loan, leading to potential financial strain.
     
     
2. Existing Business Owners: These borrowers need funding to expand or improve their premises, whether by constructing a new building or extending their current one. Their primary considerations include:
   
   
   • Operational impact: Will construction disrupt business activities?
   • Affordability: Can the business support loan repayments if there are delays or cost overruns?
   • Long-term value: Will the expansion increase revenue or efficiency enough to justify the investment?
   • Risks: Unlike developers, business owners may not have an immediate resale option, so lenders will focus on their financial strength and ability to sustain loan repayments post-completion.

Key Considerations for Lenders

• Exit Strategy is Critical: Since commercial properties have fewer direct comparables than residential projects, lenders will require a well-defined exit plan. Borrowers must demonstrate who will occupy or purchase the property once construction is complete—whether it's pre-let to a tenant, owner-occupied, or lined up for long-term refinancing.
• Fewer Lenders Available: Not all lenders offer construction loans against commercial properties because they are more complex to assess. The feasibility of the project, market demand, and borrower experience play a crucial role in securing financing.
• Staged Drawdowns & Monitoring: Rather than a lump sum, lenders release funds in stages as construction progresses. A Monitoring Surveyor will oversee the project, ensuring work is completed to a satisfactory standard before approving further drawdowns.
• Planning for Long-Term Finance: Lenders prefer to see a clear route to refinancing once construction is complete. Borrowers using Brickflow can get indicative terms on long-term commercial mortgages in advance, helping to secure a smooth transition from construction finance to permanent funding.

By working with the right lender and preparing a strong case, borrowers can improve their chances of securing a commercial construction loan and ensuring their project reaches completion successfully.

Types of commercial construction loans

Different types of commercial construction loans cater to various project needs. Below are the most common options:

Development Finance

A flexible option for ground-up construction, development finance covers land acquisition, construction, and associated costs. Loans are released in stages as the project progresses. You can find out about the different types of development finance here.

Bridging Loans for Commercial Property

Bridging finance provides short-term funding for developers and investors looking to acquire, refurbish, or repurpose commercial properties before securing long-term finance. Unlike standard commercial mortgages, bridging loans can cover light to moderate works, making them ideal for projects that require improvements before becoming income-generating assets.

When to Use a Bridging Loan?

• Refurbishment & Light Works: Funding for renovations, cosmetic upgrades, or repurposing existing spaces.
• Property Acquisition: Secure opportunities quickly, even before planning or long-term finance is in place.
• Refinancing & Exit Strategies: Bridge the gap between property purchase, development, and securing a commercial mortgage.

With fast approvals and flexible terms, bridging loans are a vital tool for property professionals navigating the commercial real estate market. You can compare Commercial Bridging Loans here.

Mezzanine Finance

Mezzanine finance is a hybrid form of debt and equity financing that helps developers bridge funding gaps between their senior loan (typically a development loan) and their own capital contribution. It sits between senior debt and equity in the capital stack, offering a flexible solution for developers needing additional funding to bring a project to completion.

How Does Mezzanine Finance Work With Development Finance?

Mezzanine finance works alongside a senior development loan, enabling developers to borrow a higher percentage of the total project cost, often increasing leverage from 60-70% Loan-to-Cost (LTC) to 80-90%. This reduces the amount of cash the developer needs to invest upfront, freeing up capital for multiple projects or larger-scale developments.

Typically:

• Senior Lender: Provides the bulk of the funding (e.g., 60-70% LTC).
• Mezzanine Finance: Covers the funding gap, allowing the developer to reduce their equity input.
• Developer Equity: The developer contributes the remaining funds, usually 10-20%.

Benefits & Risks of Mezzanine Finance in Commercial Development

Benefits:

• Higher Leverage: Developers can fund larger projects with less of their own capital.
• Greater Flexibility: Works alongside traditional development finance, helping projects move forward.
• Potentially Higher Returns: Leveraging mezzanine finance can increase return on investment (ROI).

Risks:

• Higher Cost of Capital: Mezzanine debt is more expensive than senior debt due to its subordinate position in repayment priority.
• Additional Due Diligence: Mezzanine lenders require a strong exit strategy and a clear path to repayment.
• More Complex Legal Agreements: Involves intercreditor agreements between senior and mezzanine lenders.

Joint Venture Finance

Joint Venture Finance is a funding structure where a developer partners with an investor or financial backer to fund a property development project. This is particularly useful for developers who have strong experience and expertise but lack the necessary capital to finance a project on their own. Instead of taking on traditional debt, the investor funds a significant portion—or even all—of the costs in exchange for a profit share upon completion.

Where Can You Get Joint Venture Finance?

Joint Venture Finance can come from various sources, including:

• Private Investors: High-net-worth individuals (HNWIs) looking for strong returns.
• Family Offices: Private wealth management firms that invest in property projects.
• Specialist Property Funds: Lenders or funds specifically focused on property development JV opportunities.
• Institutional Investors: Large firms willing to co-invest in sizable commercial developments.

Developers can often access Joint Venture Finance through specialist finance brokers, development finance platforms, or direct networking with investors.

What Are the Key Joint Venture Considerations for Commercial vs. Residential Assets?

• Exit Strategy: Commercial assets typically require a clear plan for resale or refinancing, particularly if the investor expects a defined return timeframe.
• Market Demand & Tenants: Unlike residential, where demand is often stable, commercial properties rely on market conditions, tenant demand, and lease agreements to drive value.
• Longer Project Timelines: Commercial developments often take longer to complete, meaning investors must be comfortable with extended time horizons before seeing a return.
• Specialist Asset Types: Many JV investors focus on traditional commercial assets (offices, retail, industrial), while others specialise in more niche markets (hotels, leisure, healthcare).
• Risk & Returns: Investors in commercial JV deals will carefully assess location, tenant strength, and future rental yields, as commercial values fluctuate more than residential.

Commercial Mortgages for Completed Projects

Once construction is complete, developers can refinance their loan into a long-term commercial mortgage, repaying the construction loan in full.

Key eligibility criteria for a commercial construction loan

Securing a commercial construction loan requires meeting specific lender requirements. Each lender has its own risk assessment criteria, but most evaluate borrowers based on the following factors:

• Credit History: Lenders assess both business and personal credit scores to determine financial reliability. A strong credit profile demonstrates responsible borrowing habits and increases the likelihood of approval. Generally, higher credit scores unlock better loan terms and lower interest rates. Borrowers with weaker credit histories may need to provide additional collateral or seek alternative lenders.
• Experience & Track Record: Developers with a proven history of successful projects are viewed more favourably. First-time developers may still secure financing but may need stronger financial backing, a co-developer, or a detailed business plan to offset the risk.
• Loan-to-Cost (LTC) & Loan-to-Value (LTV) Ratios: Most lenders offer up to 70-80% LTC and 60-75% LTV. A lower LTC or LTV reduces lender risk and can lead to more favourable loan terms.
• Planning Permission & Approvals: Before securing a loan, developers must have: Full planning permission from local authorities, compliance with building regulations and zoning laws, and environmental assessments (if applicable).

Some lenders may offer conditional funding before approval, but full disbursement usually requires final planning permissions.

Lenders will also assess the exit strategy—how the loan will be repaid once the construction is complete. This could be through refinancing onto a long-term commercial mortgage, selling the completed property, or securing a tenant for an investment exit. A well-defined exit route is essential to gaining lender confidence and ensuring a smooth transition post-construction.

You should always speak to your broker when considering your eligibility for a commercial construction loan. If your broker uses Brickflow, they can streamline the lender comparison process. Brickflow saves developers time by identifying lenders that accept pre-planning applications and those that require full approvals before funding.

How to get a commercial construction loan

The application process for commercial development funding follows a similar structure regardless of borrower type. However, lenders pay close attention to the borrower's profile and exit strategy, which can differ significantly based on the nature of the project and the party applying for the loan.

Types of Borrowers & Exit Considerations

• Independent Developer Selling to an Investor or Business

• Typically applies for development finance to fund the construction of a commercial unit with the intention of selling upon completion.
• Exit strategy: Sale of the completed property to an investor or an owner-occupier business.

• Business Owner Expanding or Refurbishing Their Own Premises

• Seeks funding to improve or extend an existing commercial space to accommodate business growth.
• Exit strategy: Refinancing onto a long-term commercial mortgage once the works are complete.
1. Investor Building Additional Units to Expand Their Portfolio
   • A commercial landlord looking to develop and retain properties for rental income rather than sell.
   • Exit strategy: Refinancing onto an investment loan or commercial mortgage, with a focus on securing tenants to generate stable rental income.

Application Steps

• Prepare Your Business Plan

• Outline the project's feasibility, including financial projections and market demand.
• Clearly define the exit strategy, ensuring it aligns with lender expectations.

• Gather Required Documents

• Financial statements, development cost breakdowns, planning permissions, and proof of experience.

• Property Valuation & Underwriting

• A monitoring surveyor may be involved to oversee progress and sign off on staged drawdowns.
• A valuer is required to verify the site's value, while a monitoring surveyor confirms the necessary build costs and oversees progress after completion. Additionally, legal loan documents must be prepared. The evaluation of these elements collectively forms the underwriting process.

• Submit an Application

• Work with a specialist broker or use a loan comparison platform like Brickflow to find the best lender.
• The lender will review the project’s risk, the borrower’s experience, and the proposed exit strategy.

• Approval & Loan Offer

• Once approved, funds are released in drawdowns to match the construction timeline.

Commercial construction loan rates & terms

Lenders assess various elements when determining loan rates:

• Project Risk Level: Higher-risk projects, such as large-scale developments or those in volatile markets, typically face higher interest rates. Lower-risk projects, like well-located office buildings with pre-secured tenants, can secure better loan terms.
• Borrower Creditworthiness: Strong business and personal credit scores help secure lower rates. Developers with successful past projects are also viewed more favourably.
• Loan Term Length: Shorter loan terms (12-18 months) may have lower rates, while longer terms (24-36 months) might carry higher interest to compensate for lender risk.
• Market Conditions: Interest rates fluctuate based on the wider economic environment, including inflation, central bank rates, and property market trends.

Fixed vs. Variable Rates

Lenders typically offer two types of interest rates:

• Fixed Rates: These remain the same throughout the loan term, providing predictable repayments and protection against interest rate increases.
• Variable Rates: These fluctuate with market conditions, meaning repayments can increase or decrease over time. Variable rates can be beneficial when interest rates are expected to drop, but they carry higher risk if rates rise unexpectedly.

Tips for Securing the Best Loan Terms

To improve your chances of securing the most favourable commercial construction loan terms, follow these key strategies:

• Maintain a Strong Credit Profile: Ensure your business and personal credit scores are in good standing. Address any outstanding debt or financial issues before applying.
• Provide a Detailed Project Plan: Lenders require a comprehensive business plan, including cost breakdowns, timelines, and revenue projections. The more detailed your proposal, the better your chances of approval.
• Compare Multiple Lenders: Different lenders offer varying rates and terms, so it’s crucial to shop around. Platforms like Brickflow allow you to instantly compare loan options and find the best fit for your project.
• Consider Specialist Lenders: High-street banks may have strict lending criteria, whereas specialist lenders can provide more flexible terms tailored to commercial developments.

How Brickflow can help with commercial construction loans

Brickflow simplifies the search for commercial construction loans by providing instant access to over 40 lenders and thousands of loan options. Benefits include:

• Faster loan comparisons
• Competitive rates tailored to your project
• Expert insights to navigate complex funding options

Use our commercial construction loan calculator to estimate your financing options and secure the best deal today.

Secure Your Commercial Construction Loan with Confidence

Securing a commercial construction loan can be a complex and time-consuming process. Lenders assess various factors, including project feasibility, financial stability, and development experience. Brickflow simplifies this process by offering an easy-to-use platform that:

• Compare multiple lenders instantly: Save time and find the best loan options without approaching multiple lenders individually.
• Matches you with the right funding: Our technology analyses your project details and financial profile to connect you with lenders suited to your needs.
• Provides expert support: Our platform is designed for brokers and developers, helping them navigate the complexities of commercial construction finance with confidence.

Whether you’re planning a new build or a major renovation, Brickflow ensures you have access to the right funding solutions—faster, smarter, and more efficiently. Start your search today and take the next step towards bringing your commercial property project to life.

Brickflow's technology streamlines the process, helping brokers and developers find the right financing in minutes, not weeks. Start your search today and unlock better funding options with Brickflow’s lender comparison tool.

Secure A Commercial Mortgage Today.

FAQs

What does a commercial construction loan cover?

It covers land purchase, construction costs, materials, labour, and sometimes professional fees (e.g. architects, engineers).

Which bank is best for construction loans?

There’s no one-size-fits-all answer. High-street banks like Barclays and Lloyds, specialist lenders, and private banks all offer competitive options. Comparing lenders is key.

Which bank is best for a commercial loan?

It depends on your project size and financial position. High-street banks offer traditional financing, while specialist lenders provide more flexible terms for complex projects.

How much can you borrow on a commercial loan?

Loan amounts depend on project costs, LTC/LTV ratios, and borrower credentials. Typically, lenders fund 60-80% of project costs.

What type of loan is best for construction?

Development finance – The best option for ground-up construction or major structural works. This funding is released in stages (drawdowns) as the project progresses, ensuring cash flow is managed efficiently.

Bridging Loans – Suitable for short-term financing, particularly when purchasing a property or land before moving onto a development facility. Bridging finance can also be used for refurbishment or light works, but it is not appropriate for full-scale construction where staged funding is required.

When considering a construction project, the extent of the work will determine the most suitable loan type. For anything beyond light refurbishment, development finance is usually the best fit.

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