The Value of SBA Loans in Construction Today
The U.S. Small Business Administration (SBA) has a lot to offer businesses today – especially its business loans. The SBA’s 7(a) loan can cover up to $5 million and is flexible in use, making it a very popular type of loan. Construction loans are often the largest in the 7(a) loan program since commercial construction projects are frequently big and costly. 7(a) loans can be paid out in multiple disbursements instead of single-sum one-time payments. Therefore, these loans are good for businesses to pay contractors in stages, and the loans can be provided around the building work stages. There are a lot of risks associated with expensive, big construction projects - the 7(a) loan’s platform of multiple payment distributions can aid in lowering that risk with the identification of multiple building project stages.
The lenders and borrowers should have agreements in place in the contracts on issues such as construction modifications for the 7(a) loans. There is value to keep on track with the multiple payment distributions, loan dollar-amount agreements, and the desire to keep expensive change orders in check (those beyond the contract). Agreements within the contract should exist to stop borrows from getting added-on construction revisions without approval from the lender. For example, there may be HVAC problems with additional costs late in construction, or the borrower might wish to change something such as plumbing fixtures.
The borrower needs to sign and date the “Authorization for Distribution” to finalize the loan agreement. This document shows the construction cost amount status comparing the balance to the total sum. It also includes: Inspection reports; Completed W9s for vendors; Lien waivers for contract work; Completed AIA (American Institute of Architects) forms for contracted work and change orders; Invoices and credit statements; Borrower’s location and contact information for receiving funds; and Inspection reports. And each separate fund payment request requires an additional Authorization for Distribution form.
There should be copies of construction plans and approvals on project specs included with the loan. And additional documentation, such as builder’s insurance certifications proving the contractor’s worker’s compensation, may be required for the loan. All of this may be expected by the lenders for the SBA loan to be approved.
Finally, there are some additional documents which are not necessarily required, but can help in getting the loan payments approved faster. These can include the SBA 601 (Agreement of Compliance forms for builders receiving more than $10,000 during the project) and the completed IRS W9 forms for independent contractors. This paperwork might also have forms showing price totals and descriptions of the work, signed by licensed and insured builders.
SBA loans expect these types of filled requirements and forms for commercial construction projects. Read more about commercial construction and Buildrite’s commercial construction services.
