The short answer: A commercial construction loan is short-term financing for ground-up development or major renovation. Instead of a lump sum, the lender releases money in draws as construction milestones are completed and inspected, and you typically pay interest only on the funds drawn — often from a built-in interest reserve. Loans are sized on loan-to-cost (LTC) and loan-to-value (LTV), and when the project is complete, the construction loan is repaid by selling or refinancing into a permanent loan (a "construction-to-perm" path).
Building from the ground up is one of the more complex things to finance. This guide explains how construction loans work, what lenders require, and how the money actually flows. To talk through a project, reach out or apply now.
How a construction loan works
A construction loan funds the project in stages rather than all at once. You (and your builder) draw money as work is completed — foundation, framing, and so on — and each draw is verified by an inspection before it's released. You pay interest only on what's been drawn, which keeps early payments low. Many loans include an interest reserve so the loan itself covers interest during construction, before the property produces income.
Draws, interest reserve, and the permanent takeout
- Draw schedule — funds released in stages against completed, inspected milestones.
- Interest reserve — a portion of the loan set aside to pay interest during the build.
- Loan-to-cost (LTC) & loan-to-value (LTV) — lenders lend a percentage of total project cost and of the finished value; you fund the rest as equity.
- Construction-to-permanent — the plan to repay the construction loan by refinancing into a permanent loan or selling on completion. For interim needs, a bridge loan can help.
What lenders require
- Equity in the project — expect to fund a meaningful share of total cost.
- A qualified builder and detailed budget — plans, specs, permits, and a realistic cost breakdown.
- A credible timeline and pro forma — what the finished property will be worth and earn.
- Borrower credit, experience, and reserves — development experience helps a lot.
- A clear takeout — how the loan gets repaid at completion.
How Market Capital Lending helps
We arrange commercial construction and development financing through a network of 40–50 lenders, with 40+ years of experience and $375M+ funded. Construction deals are lender-specific — appetite varies widely by property type, location, and sponsor — so our network is exactly where it pays off: we match your project to a lender comfortable with it and help line up the permanent takeout. Explore construction loans or start your application. (Rates, approval, and terms vary by credit, collateral, loan amount, and underwriting.)
Frequently asked questions
How is a construction loan different from a regular loan?
Money is released in draws as work is completed and inspected, not as a lump sum, and you pay interest only on what's drawn. When construction finishes, the loan is repaid by selling or refinancing into permanent financing.
What is a draw schedule?
The plan for releasing loan funds in stages as construction milestones are completed and verified by inspection — for example, after the foundation, framing, and final completion.
What is an interest reserve?
A portion of the loan set aside to cover interest payments during construction, before the finished property produces income.
How much equity do I need for a construction loan?
Lenders size loans on loan-to-cost and loan-to-value, so you'll fund a meaningful share of total project cost as equity. The exact amount varies by project and lender.
What is construction-to-permanent financing?
A structure where the short-term construction loan is repaid by rolling into (or refinancing into) a long-term permanent loan once the project is complete.