There are risks involved in any loan. The business construction loan has two basic risks that must be considered by a lender.

The Commercial Construction Loan is a particular type of Commercial loan that is made for the purpose of financing the construction of a building or buildings that are intended to be used for the generation of profit. This may be anything from the building of Condos intended for rental purposes to the building of a new addition to a factory or existing commercial enterprise.

The first area of risk is called the Construction Risks. This is usually seen as a failure to follow the construction budget. The Commercial Construction loan is geared to provide the funds necessary to finance the cost according to the budget. A good budget will allow a certain amount of capital to be set aside to cover some expected problems or delays in construction, but unfortunately, many building projects and their budgets are grossly understated or overly optimistic. When the budget is exceeded, it impacts the status of the loan. Usually, this means that more funds must be made available to cover the overrun of the budget increasing the risk to the lender.

It is common for a Commercial lender to oversee the construction project very closely. In most cases, the entire amount of the loan will not be made available all at once. The lender does not just hand over the entire sum and then go about their business waiting for repayment at a later date. The risks are too great to make this feasible. The lender will usually advance the funds a little at a time and then check very closely on how they are being used and how close to budget the project is proceeding. It is for this reason that many lenders prefer to make Construction loans as close to home as possible. This allows closer monitoring of the progress of the project.

The second area of risk is market risk. This is the possibility that the completed project, even assuming it is completed on time and within budget, will fail to produce the expected results and income generation to repay the Commercial Construction loan. This is a risk that is shared equally between lender and builder. The time to evaluate this risk and prepare for its consequences is before the first shovel of earth is turned in the construction process, not when the completed building sits empty and unprofitable. It is important that a good business plan be presented and every effort to evaluate the potential profitability of the project be done before the loan is made.

There is no way to totally eliminate risk. This is true in business, investment, or indeed, in life itself. You can only minimize risk. There are many ways this can be done. You can do it by following sound financial planning principles that include such things as insurance. You can do it by careful analysis of your plan and your goals before a project is begun. However, all this will do is minimize the risks. Nothing will ever make them completely go away.