How SBA Loans Apply to Construction
The SBA’s (Small Business Administration) most popular loan program is the 7(a), since caps can reach up to $5 million and it is flexible for use. This loan makes it easy for businesses to do new construction and/or buy land. For such projects the SBA 7(a) loans are provided in multiple disbursements (as opposed to lump-sum payments). This loan model is available for businesses paying construction companies or contractors in work completion stages. These loans are often the largest in the 7(a) program since commercial construction projects are often big and costly. Since large construction projects can be risky, the loans’ multi-payment structure helps reduce that risk in what would otherwise be big lump-sum payments for construction projects. There are vital documents which should be included in loan contracts such as agreements between lenders and borrowers emphasizing that borrowers won’t allow modifications to approved plans without consent from the lenders. For example there may be desire to change lighting fixtures after construction. Or there could be air conditioning problems which would increase HVAC fees. Additional documentation for the loan might be proof of the builder’s insurance certificates - proving the contractor has insurance for worker’s compensation. There should also be documentation such as copies of approved plans and project specs. All of these are documents which the SBA expects lenders to obtain. In order to complete a loan agreement, the “Authorization for Disbursement” must be dated and signed by the borrower. This shows the construction project budget status comparing the balance to the total amount. Each fund request requires a new form. In a package with these materials should also be inspection reports, lien waivers for contract work, all credit statements and invoices, completed W9s for vendors, completed AIA (American Institute of Architects) forms for contracted work and change orders, and the borrower’s location/contact and account info for sending the money. There are also additional forms which are not necessarily required for SBA loans, yet can help obtain quicker approvals for loan disbursements. These would include contracts signed by licensed and insured contractors. These documents should include price totals and descriptions of work. Additional documents can be the SBA 601 (the Agreement of Compliance forms for contractors receiving more than $10,000 for the project) as well as finished IRS W9 forms (for independent contractors). These are the standard items and expectations for SBA loans for commercial building projects. Interested in more about commercial building? Read about Buildrite’s renovation services.