How to finance your commercial renovation

Business renovations can come with cash flow challenges. A large renovation may require a significant upfront investment, which could pinch your cash flow. You may have to deal with payment delays or uneven payment schedules that could further impact the financial strain. Add to that surprise costs, project delays, price fluctuations on materials and even unexpected weather, which can all cause disruptions to your well-crafted business renovation project budget.

That’s why commercial renovations typically require financing in the form of business loans. And fortunately, there are several options.

Common types of commercial renovation loans

The process of getting a commercial renovation loan depends on several factors, such as the size of the project or the expertise of the company. For example, if you’re looking to make tenant improvements, the loan would be correlated to the length of the term and lease, among other factors. ACU’s Business Financial Centre (BFC) has helped hundreds of Manitoba small and medium-sized organizations—including non-profits and schools—secure loans for projects, including renovations and construction.

Common business loan types include a construction or renovation loan, business line of credit and equipment loan. Let’s explore each financing option.

1. Construction or renovation loan

This is the most common loan type for commercial renovation projects. Whether you’re expanding, renovating or funding a large purchase, this business loan can provide you with the cash you need to bring your project to fruition.

Note that the loan terms for construction or renovation loans will differ, depending on the project and asset class. The timelines for loan repayment will also vary from project to project. ACU can offer flexibility and assistance during the loan period.

For example, with new construction projects, ACU’s BFC may allow up to 24 months where the borrower pays just the interest to allow for construction and stabilization of the project. The BFC team will outline a defined repayment plan that works with your cash flow and budget.

ACU loans are suitable for businesses of all sizes, with competitive fixed and variable interest rates. Variable rate loans are open and repayable at any time without penalty. Depending on the project and asset class, repayment terms can go up to 25 years. However, renovations are different; the repayment terms may be tied to a lease or standalone facility, which would typically be five years. In some cases, ACU can tie it into the mortgage on renewal, which means the renovation repayment could be done over 25 years.

2. Business line of credit

For a smaller renovation, a business line of credit may be a good option. An ACU business line of credit provides a variable interest rate based on prime rate + premium, depending on risk. The borrower pays interest only on the portion of the line of credit they use, and exact-dollar borrowing can help keep interest expenses down.

3. Equipment loan

This is specifically for financing the purchase, modernization or improvement of equipment to expand or modernize business operations. Business owners often use it to replace out-of-date equipment or machinery.

How to get commercial renovation financing

Before submitting your application to finance a commercial renovation, it’s important to do your research and prepare your documentation in advance.

“Start by talking to your account manager about your goals, and then determine the best type of loan for your renovation—because every project is different,” says Martin Petras, ACU’s Associate Director of Commercial Real Estate and Syndications.

As an account manager, Martin understands the borrower’s overall business, capital structure and strategic goals. That includes assessing risk, debt and cash flow—including proven access to capital. The individual or group’s experience is also important. “Those inform how we structure a deal to help you get the right financing for your renovation project,” he explains.

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When applying for your loan, your BFC Account Manager will want to know:

• The source of equity for the credit facility applying for a loan
• Your financial information
• Your income sources
• Liquidity
• Cash flow
• Contingent liabilities (possible future liabilities)
• Other relevant factors determined through the interview/analysis process

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Financing for business renovations will depend on the size and scope of the project. The most important factor, however, is cashflow. Will the business be able to support the renovation project?

For example, if the renovation is for an income-producing property (most renovations would fall under this category), then the borrower will need:

• Debt service coverage (DSC)
• Loan-to-value (LTV)
• Location
• Adaptability and age
• Rental income quality
• Cash flow projections

If the financing is for an operating company that is expanding a warehouse, office space or other facility, much of the same would apply. However, the lender’s evaluation will also consider how renovations impact the business financials and the financials would have to support the loan.

Depending on the size and scope of the project, the borrower would need:

• Detailed Class A budget: Providing clarity on financials to gauge the exact capital required and anticipate demands during renovations
• Fixed-price contracts: To minimize budget overruns and risk, locking in your expenses from the start
• Bonded sub-trades: For contracts over a certain amount, depending on the size and experience of the borrower
• Quantity surveyor (QS): This team member ensures your project costs and progress align with what is budgeted

Small business renovations may only require that the borrower provide invoices for work completed. Once received, the lender will generally release the loan amounts.

Tips for managing costs during renovation

There are plenty of renovation stories where costs have spiralled out of control. To successfully manage costs during a renovation, it’s important to develop a realistic budget from the get-go, taking into account the scope and size of the project and any associated permits and fees.

Another tip is to use construction or project management software to help track the progress of a renovation project, monitor costs and potentially identify areas to save money.

It’s also essential to have a contingency fund in case of unexpected surprises, such as a project delay or an increase in the price of building supplies.

“For a one-off commercial renovation, we make sure the borrower has a reputable general contractor in place, a fixed-price contract and a QS report, so we can monitor monthly reporting to see if the project is staying on budget,” Martin says.

Why choose a credit union for financing

Credit unions offer personalized service, competitive rates and flexible terms with a community focus. For example, the BFC offers guidance and advice that supports and encourages the growth and good financial health of businesses in Manitoba.

With a strong commitment to community and deep expertise in real estate and construction financing, the BFC isn’t like any other commercial lender. BFC’s portfolio of successful projects ranges from expanding independent family businesses and building extensions for fast-growing schools to major renovation work on multi-residential and commercial properties.

With the BFC, you get a local, dedicated account manager who provides access to business accounts, deposit strategies, commercial mortgages, construction financing, term loans, operating lines of credit, letters of credit and much more.

“We listen to our members and know what’s important to them,” says Martin. “We like to think outside the box and plan a structure that’s unique for the deal and for the member, and that is specific to their situation.”

We’re here to help with all your commercial renovation needs.

Book an appointment today and learn how ACU can bring you closer to your business goals.

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