Construction Finance for Business: Building Your Premises or Project

Construction finance funds the building of commercial premises, such as a new warehouse, office, shop or a small development. Unlike a normal loan, the money is paid out in stages as the build progresses, and you usually only pay interest on what has been drawn.

Building gives you premises designed for your business, but it also brings more risk than buying. This guide explains how lenders fund construction and how to plan for the things that commonly go wrong.

How progress payments work

The lender approves the loan based on the land value, the building contract and the expected finished value
Funds are released in stages, such as slab, frame, lock-up, fixing and completion
Before each payment, the lender usually checks the work with a quantity surveyor or valuer
During the build, you generally pay interest only on the amount drawn
At completion, the loan converts to a standard commercial loan, or is repaid from sales

What lenders need to see

Approved plans and a development or building approval from council
A fixed-price building contract with a licensed builder (lenders prefer these)
A detailed budget, including a contingency for overruns
Your deposit and funds for costs not covered by the loan
Your experience, especially for larger or riskier projects
For developments, evidence of pre-sales or pre-leases

How much can you borrow?

Lenders look at the loan as a share of total costs (land plus build) and of the expected finished value. Small owner-occupier projects with a strong business behind them are often easier to fund than speculative developments. Larger developments may need specialist or private lenders, at higher rates.

If you already own the land, its value can often count towards your contribution.

Common risks to plan for

Cost overruns: keep a contingency, as the lender may not increase the loan
Delays: weather, approvals and trades can push out timelines, adding interest
Builder problems: check the builder’s licence, insurance and track record
Valuation shortfalls: if the finished value comes in lower, you may need more money at the end
Market changes: for developments, falling prices can affect sales and the final loan

GST and tax on construction

GST often applies to building costs and to the sale of new commercial premises. If you are registered for GST, you may be able to claim GST credits on construction costs. The ATO’s commercial property and GST page has the detail. Plan your GST cash flow with your accountant, as you may need to fund GST before you claim it back.

Construction through super

An SMSF can’t use a borrowing arrangement to build on land it already owns, or to improve a property bought with an LRBA. If you’re thinking about building through super, talk to your accountant first. See the LRBA explained.

How we help

We match your project with lenders that fund your property type and size, help you prepare the budget and documents lenders want, and keep things moving through each stage.

FAQs

Do I pay full repayments during the build?

Usually not. Most construction loans charge interest only on the amount drawn during construction.

Can I be an owner-builder?

Some lenders accept it for smaller projects, but many prefer a licensed builder on a fixed-price contract.

What happens when the build is finished?

The loan usually converts to a normal commercial loan. Some borrowers refinance at that point to get better terms, now that the property is complete. See commercial property refinance.

Albert Waldron is a Credit Representative (407514) of Australian Finance Group Ltd, Australian Credit Licence 389087. This is general information only and does not take into account your personal circumstances. Please seek advice before acting. Commercial and business loans are subject to lender approval, terms and conditions.