It’s never the poor vision — but the financing structure that makes a construction project fall apart.
As a construction developer, you can have all your permits approved and subcontractors scheduled for the day. But the real question is, would anyone work, considering you’re falling short on finances due to delayed funding?
Timely payments are always demanded by subcontractors and building teams. However, there’s a major flaw with traditional funding options. Not only do they delay the construction process by 20% to 40% of the project’s original duration, but they also compromise the commitment to the client.
As private lenders operate outside the rigid regulatory oversight of traditional banks, their loan options allow borrowers to secure funding within a few days, preventing delays.
Read more into the details below to complete construction projects uninterrupted.
What Are Private Construction Loans?
If you consult private lenders for short-term financing, their offering is classified as a private construction loan. These types of loans ease construction financing by streamlining the process and preventing delays or interruptions in payments. The lenders offering these solutions are independent of banks but are well-regarded among the network of mortgage brokers.
Securing loans from private lenders is extremely easy. This type of loan potentially helps with speeding up the construction process, while offering flexible terms for land acquisition & raw materials.
Here are some of the features of private loans for construction you should know about:
- Funds are released in multiple stages.
- Loans match the construction timeline.
- Loans feature higher interest rates (roughly at 10% to 12%).
- Fund release approval is generally faster.
- Payment is required only for the interest portion of the funds borrowers draw out.
- Loans are designed for a seamless exit strategy.
Private loans aren’t handed over to you with a lump sum at once — but are released gradually as each milestone of the construction is achieved. These milestones involve different stages of construction, including the foundation, framing, roofing, and finishing. In this way, the lender is assured that the funds are being used for the intended purpose, while the developer maintains a steady flow of incoming funds to keep construction on track.
How Private Construction Loans Differ from Traditional Bank Loans
People often mistakenly believe the difference between private and traditional loans lies solely with the lender. However, the rabbit hole goes deeper than that.
Noting how traditional bank loans offer long-term stability, it’s no surprise that they require extensive documentation and strong credit profiles. That said, the philosophy for banks is quite simple. The more good you look on paper, the quicker it’ll be for them to trust your credibility.
But not everyone has the qualities that banks need to lend them funds for construction. This is where private construction lenders make things easier. Even though their solutions are comparatively costlier, they speed up the construction process while offering flexibility benefits.
Take a look at this table for better insights.
| Aspect | Private Loan for Construction | Traditional Bank Loan for Construction | |
| 1. | Type of Lenders | Wealthy Individuals | Private Equity Firms | Banks | Credit Unions |
| 2. | Speed of Approval | Fast (within a few days or a week) | Slow (within a month or two) |
| 3. | Interest Rates | Higher (between 8% to 15% or more) | Lower (4.5% to 6.5%) |
| 4. | Down Payment | Comparatively lower | Between 20% to 30% |
| 5. | Lending Conditions to Release Funds to the Borrower | Asset or project value as collateral | The borrower’s credit score or their income |
| 6. | Flexibility | Customized payment schedules | Rigid payment schedules |
| 7. | Loan Duration | Short term (less than 1 year) | Comparatively longer (between 6 months and 2 years) |
| 8. | Regulations | Light | Heavy |
| 9. | Documentation | Minimal with project plan & appraisal | Extensive with tax returns & pay stubs |
The Impact of Choosing the Wrong Type of Loan
People aren’t wrong to say that time is money, because that definitely is the case when it comes to construction. If you go with a funding option — not private construction loans— that delays the process and won’t generate as much ROI as you’d expect.
Construction loans are extremely risky for both the lender and the borrower. Considering the fluctuations in material costs and labor shortages, it’s important to make smarter decisions. Time, money, progress — everything has to be on the same page. While private lenders offer you with flexibility, traditional options tend to restrict you.
Here’s what can go wrong if you opt for traditional bank loans.
- Floating interest rates can change at any time during construction.
- Non-negotiable increment of loan if prices hike
- Payment of two closing costs during construction and later, for the mortgage
- Responsibility to bridge the cash gap if the market dips
- Strict draw schedules based on milestones
- Higher chances of project completion delay
- Increment in total borrowing costs
- Complex approval leading to loan revocation
See also: How Professional Design Boosts Business Success
How Private Loans Speed Up the Construction Process
Acceleration of the construction process always favors the developer & owner. It saves you the trouble of waiting weeks or months for approval, bringing the wait down to just a few days.
You see, with the right mortgage experts — such as OMJ Mortgage — you can connect with a network of trustworthy private lenders. As they aren’t associated with any banking institution, you can expect speedy progress of construction.
Here’s how private construction loans speed up the construction process.
- Shorter approval timelines → save from the trouble of extensive timelines of internal bank reviews.
- Project’s strength determines the funding decisions → doesn’t require any income stability or credit score.
- Faster access to capital for beginning the project.
- Draw schedules that match the project’s phases.
- Quicker release of funds between milestones.
- Flexibility for small changes coming up in the middle of the project.
- Comparatively lesser documentation.
- Lower exposure to rising material costs → sparing out-of-pocket costs.
- Faster market entry → directly supporting profit margins.
Who Should Consider Private Loans?
It’s one thing to know the benefits of private loans, and it’s another to understand if it’s the right option for you.
This type of loan can only work out for you if:
- You’re a developer working on tight project deadlines or managing transitional projects.
- You’re an investor seeking short-term capital before refinancing.
- The project doesn’t meet the bank’s strict requirements.
- You’re a builder prioritizing speed over interest rate.
That said, if you want to prioritize long-term cost efficiency, traditional bank loans are a good choice. However, if your strategy entails execution speed, capital flexibility, and competitive positioning — then private financing options are a better fit.
Ready to Build Faster and Smarter?
When you make smart decisions that align funding with timelines, the cards always fall in your favor. It’s not just the design that determines the success of your construction project. Though how efficiently the capital moves indicates your chances of success.
At the end of the day, choosing the right loan option is all about matching it to the project’s pace. For this reason, private construction loans are the most suitable funding option to build faster and smarter. Award-winning mortgage firms like OMJ Mortgage are equipped with experienced professionals and a wide network of private lenders offering feasible funding solutions to your construction needs.
Want to get more details?
