Cover Your Small Business Construction or Renovation Costs

Katie Fleming

Katie Fleming

Co-founder and COO of Owner Actions

A retail storefront that may require an owner to set aside money for business construction or renovation costs

It can be expensive to start a small business, especially one that requires a high-traffic physical location. Many business owners find that the costs for real estate acquisition, construction, and renovation are some of the most expensive early investments they’ll make.

In this article, we’ll discuss some of the most commonly used ways to finance your business construction and renovation costs.


What are some popular ways to finance these costs?

Checking and savings accounts

The money you have accumulated in these kinds of accounts is the easiest to access and use to buy or improve a property. Many small business owners use this pool of cash before considering any other sources of capital. If you have cash available in either of these kinds of accounts, calculate how much you’re willing to part with to buy, build, or improve a piece of property.

You can contact a financial adviser or wealth planner for help with these calculations.


Investment accounts

Do you own stocks, bonds, or mutual funds in a taxable investment account? If so, you might consider selling them or borrowing against them with a portfolio loan to cover your real estate costs.

Should I sell them? By selling your securities, you could raise all or a portion of the cash you need to buy or improve a piece of property. However, sales can result in mutual fund fees, broker commissions, and the realization of capital gains. Be sure to speak with a qualified investment professional before proceeding with this option.

Should I borrow against them? In a portfolio loan (sometimes called a pledged asset line), lenders use your investment savings as collateral and allow you to borrow up to 70 percent of the cash value of your accounts. Because these loans are backed by collateral, they tend to have low interest rates and are relatively easy to qualify for, provided you can meet the funding minimum your lender requires.

You can learn more about portfolio loans in our guide, Small Business Financing 101: Portfolio Loans.


Personal lines of credit

Your bank or credit union may help you set up a personal line of credit to use however you see fit. A line of credit provides access to a predetermined amount of cash that you can borrow and repay according to the terms your lender provides.

This option involves some degree of risk. Failure to repay the funds you borrow could lower your personal credit score. It can also keep you from attaining favorable terms on any loans you need to take out in the future.

Interested in this form of funding? Reach out to a local bank or credit union or contact an online lender.


Retirement plans

Have you been contributing to a retirement savings account? You might be able to use those funds to cover some of your upfront expenses. There are several ways to access the funds in your retirement savings accounts. Of course, it’s important to note that any use of your retirement savings introduces risk, and in some cases, significant taxes and penalties.

For more information about using your retirement plan to cover real estate costs, check out this guide:


Home equity

Do you own a home or other properties? You may be able to borrow the difference between what you owe and what the property is worth. Many lenders offer home equity loans with favorable terms and minimal restrictions on how the funds can be used. The drawback is that these loans require you to put up your house as collateral. This means you could lose your home if you fail to repay the loan.

Be sure to speak with a trusted lender before considering this option.


Cash-out mortgage refinance

Another option is refinancing a mortgage you have on your home or another property to secure the funds you need. With a cash-out mortgage refinance, you have the option to pocket the difference between what you owe on a property and 80 to 95% of the property’s full appraised value.

Rates and closing costs can be higher with this option than a traditional refinance, so this option should be considered carefully before moving forward. Speak with a trusted lender before considering a cash-out mortgage refinance to cover your real estate costs.


Second mortgage

You could also consider taking out a second mortgage on a property you own to cover your real estate costs. Second mortgages are structured very similarly to a traditional home mortgage with clear repayment terms and interest requirements.

It can be difficult to find a lender who’s willing to provide this type of financing. Most banks view second mortgages as higher-risk investments of their money. Those that offer them tend to charge higher interest rates than they might for a traditional home mortgage. Be sure to speak with a trusted lender before considering a second mortgage.


Term loan

Many business owners apply for term loans to cover some of their real estate acquisition or improvement costs. Term loans, which can be attained through a bank, credit union, or online lender, generally have favorable terms and long repayment schedules. However, they can be difficult to qualify for, especially for borrowers with less-than-perfect credit.

To learn more about term loans and their qualifications, read our guide, Small Business Financing 101: Term Loans.


SBA loan

SBA loans are one of the most commonly used ways to finance the early-stage costs of starting a business. Named after the Small Business Administration that guarantees them, these loans enable business owners to finance a large portion of their startup costs, working capital expenses, equipment needs, and building acquisition or improvements.

The SBA offers three kinds of 7(a) loans to small business owners to cover up to 90 percent of their startup costs, working capital, and equipment needs. They also offer 504 loans for the purchase of existing buildings, the purchase of land or land improvements, the construction of new facilities, the renovation of existing facilities, and the purchase of long-term machinery.

Want to learn more about SBA loans and their requirements? This guide can help: 


Asset-backed financing

Many lenders offer asset-backed loans to small business owners who are willing to leverage their business’s valuable assets. Through these loans, you may finance your new business’s inventory, machinery, non-mortgaged real estate, or another tangible asset that has verifiable value to access fast funding.

Asset-backed loans are often easy to qualify for and attain, even for borrowers with less than perfect credit. To learn more about asset-backed financing, check out this guide from our Small Business Financing 101 series:


Commercial mortgage

You may want to consider a commercial mortgage to cover the costs of a real estate acquisition. Many use this form of loan to purchase an owner-occupied office building, retail center, warehouse, or other commercial property.

In some ways, commercial mortgages are similar to residential mortgages. The key differences are their term length and the amortization period. Commercial mortgage terms often range from five to twenty years, and the amortization period extends past the term of the loan. Loans structured this way usually require a borrower to make equal installment payments for the life of the loan and a final balloon payment.

These loans sometimes require higher down payments than SBA-backed options, and they can be slightly more difficult to attain. In addition, many lenders require borrowers to guarantee the loan. This is often the case when the borrower is an individual or an entity with limited borrowing history.

You can learn more about commercial mortgages and real estate loans in this guide:

If you are interested in attaining a commercial mortgage, be sure to speak with a bank or credit union lender in your area.


Commercial bridge loan

Some lenders offer short-term commercial bridge loans, or gap financing, to business owners who want to buy a commercial property and refinance it into a mortgage at a later date. Most commercial bridge loans offer terms between 6 and 36 months and require a down payment of at least 10 percent of the loan to value. However, terms can vary greatly by lender. You may find options for interest-only payments and nonrecourse loans in which the borrower does not have to guarantee the loan. These forms of commercial bridge loans can be especially attractive options for short-term cash needs.

For more information about commercial bridge loans, read our article, Should a Commercial Bridge Loan Be Part of Your Financing Strategy?.


Commercial hard money loan

Non-bank lenders sometimes offer commercial hard money loans that are secured by the borrower’s property. This short-term option allows business owners to purchase a commercial property quickly, with flexible terms, and often without checks to their credit history. However, the interest rate on these loans is usually high. Because of this, many borrowers view these loans as a last resort option and refinance them into a mortgage with a significantly lower rate at a later date.

Some online lenders offer hard money loans, but most small business owners turn to friends, family members, or local real estate investors to secure this form of funding. Be sure to evaluate the terms of a commercial hard money loan carefully before proceeding with this option.


Equipment leasing

Because many small businesses require expensive equipment for daily operations, your business’s equipment needs should factor into your upfront real estate improvement costs.

Rather than buying and leveraging the equipment your business needs to operate, you may consider leasing large-ticket pieces of equipment. Many equipment wholesalers and distributors offer five-year leases and provide the option of purchasing the equipment at the end of the lease period.

For more information on equipment leasing, read our Small Business Financing 101 article, How to Save on the Equipment You Need to Start or Grow Your Small Business.


Another option: Partnership

If you find you can’t raise enough cash through these options or you aren’t comfortable tapping into a significant portion of your savings or equity, consider bringing on a partner who can help you cover your startup real estate costs.

There are risks and benefits to partnerships that should be considered carefully before proceeding. And, if you’re considering starting a franchise rather than an independent business, take note: Franchisors will want to know about any person (or entity) interested in claiming an ownership stake of a franchise unit. Be sure to discuss this option with your franchise representative to learn what’s feasible and how you might navigate a shared ownership arrangement.

For more information about forming a partnership, read our guide, Tips for Forming a Partnership to Start a Business.

Before selecting any financing option, be sure to speak with a banker who can help you evaluate financing options to raise the cash you need to cover your business construction and renovation costs and minimize your risk exposure.

Here are a few business owner-friendly options:

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Commercial Loan Direct

Business Loans Made Simple

Commercial Loan Direct is a no-frills lender that provides conventional loans, SBA loans, construction loans, bridge loans, and other forms of financing to help business owners go after their goals. Many owners start with CLD’s Commercial Loan Finder, a tool that points them in the direct of loan programs that best suit their needs. Interested in learning more? Visit their website through the link below to get started.

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Quick Business Loans to Help All Businesses Grow

With their simple, streamlined two-minute application, GoKapital makes it easy to apply for financing. GoKapital offers a wide range of financing options. These include business cash advances, equipment financing, unsecured loans, and no credit check loans. They also offer more traditional loan products that, on average, close in two-to-four weeks. Ready to explore their loan options? Click the button below to get started.

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Square Banking

Money to Keep Your Business Moving Forward

Square offers checking accounts, savings accounts, and loan products exclusively to owners who process with Square. Their loans, which are backed by your card sales through Square, charge a flat fee (no interest) and are repaid automatically with a percentage of your daily card sales. Would you like to learn more about this new way to finance your expenses? Follow the link below to explore the offer.


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