How Does a Pre-Construction Loan Work? (Explainer)

Pre-construction loans are debts taken to pay for all the tasks that need to be completed before a contractor can commence work at the construction site.

These errands include obtaining a building permit, conducting due diligence on suppliers as well other tasks that must be completed ahead of the project.

Although permits for construction of single houses are not too expensive, homeowners undertaking massive projects may have to pay anything from several hundreds to several thousands of dollars.

Planning permissions are usually calculated based on the square footage of the floor – at $470 per 75 square meters. For spaces above 3,750 square meters, the cost falls to $140 per 75 square meters up to a maximum of $300,000.

Cashflow crisis

This means a big residential building can cost over $5,000 in planning permission alone, without factoring other costs that can add up to tens of thousands.

Meeting these costs can be quite challenging for financially-strained developers who can easily fall into a cashflow crisis.

Fortunately, these challenges can be solved by a pre-construction loan, although some developers slash their expenses instead of relying on pre-construction credit.

How do pre construction loans work

As mentioned earlier, pre-construction loans are taken to pay for tasks that must be completed before work starts on site. These loans are secured against property.

Borrowers must make careful reflections before taking up a pre-construction loan as failure to repay the debt can lead to the loss of the asset used as collateral.

So, how do pre construction loans work? Different lenders have different standards for the project they can lend on.

For example, while some banks may readily accept a commercial property as collateral, the project itself may need to be of a residential development.

That being said, developers are unable to use their upcoming projects as collateral since they are likely to have financial attachment set for all stages of construction.

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