Commercial construction loans for builds, fit-outs and extensions

How does a commercial construction loan work?

Unlike a normal mortgage, a construction loan does not hand over the full amount on day one. The lender releases money in stages, called drawdowns or progress payments, as parts of the build are completed. Before each payment, an inspector or quantity surveyor typically confirms that the work is where it should be. During construction you usually pay interest only on the amount drawn, so the cost builds up as the project moves forward.

This protects the lender, because the security grows in line with the money it has advanced. It also keeps borrowers honest about costs and timelines. Our guide to construction loan progress payments walks through the mechanics.

What kinds of commercial builds can be funded?

• Warehouses, factories and industrial units
• Offices and medical suites
• Shops, showrooms and retail strips
• Childcare centres and other purpose-built facilities
• Mixed-use buildings with commercial space and apartments
• Extensions, major fit-outs and conversions

Different lenders favour different project types. Some fund small to medium builds for owner-occupiers, others prefer developers with a record, and some specialise in particular uses.

Who is this for?

• Business owners building premises on land they own or are buying.
• Investors constructing a building to lease.
• Developers building to sell or hold.
• Owners adding to an existing building.
• First-time builders who have done their homework and have equity.

What do lenders look at before approving a build?

Area	What they check
Approvals	Permits, planning conditions and any outstanding requirements
Plans and costs	Specifications, quantity surveyor’s report, budget and contingency
Builder	Licence, insurance, track record and contract type
Borrower	Experience, equity, other debts and conduct
Security	Land value, as-complete value of the building and saleability
End loan or exit	How the construction facility will be repaid or converted

A fixed-price contract with a reputable licensed builder is the common standard. Lenders can be more cautious with cost-plus contracts, owner-builder arrangements or untested builders.

What are the taxes and costs to plan for?

Beyond construction costs, budget for holding costs, consultants, council and authority fees, finance costs, insurance and legal work. Transfer duty applies to land purchases and is set by each state and territory revenue office. GST affects construction and sales in several ways, including whether a completed building is sold as a taxable supply, and the ATO publishes property GST guidance. Your accountant should model these before the budget is finalised.

How does Ownright approach commercial construction?

We treat construction finance as a project, not a form. Ownright Custom Finance looks at the build, the people and the end result, then chooses lenders whose appetite fits. Trevor Scott’s 40-plus years in finance means we know the weak points that stall projects: a thin contingency, a builder contract that does not suit the lender, a gap between the end of the build and the end loan.

We help you build the funding plan around those points. We also look at how to hold the land and early costs, which is where short-term finance sometimes comes in. If you are planning a build, tell us about it here before locking in a builder if you can.

An illustrative example

Illustrative only, no real client. A business owns a vacant block and wants a workshop with a small office, to be occupied by their own business. They have approvals, a fixed-price contract with a licensed builder and a quantity surveyor’s report. A lender could fund the build in stages against the land equity and the owner’s contribution, then convert to a longer-term loan after completion. If land settlement and construction approvals do not line up, an interim loan might fill the gap.

Mistakes to avoid

• Starting before the finance structure is agreed.
• Underestimating contingency and delays.
• Choosing a builder contract the lender will not accept.
• Forgetting GST, duty and holding costs.
• Not planning how the loan converts or is repaid after completion.

Documents that help

• Plans, specifications and permits
• Builder’s contract and licence details
• Quantity surveyor’s report or detailed budget
• Land title and purchase contract, if applicable
• Borrower financials and entity documents
• Evidence of equity contribution

How are costs and variations managed during a build?

Even well-planned builds experience variations. A change to the design, a discovery on site or a supply delay can add cost. Lenders therefore like to see a contingency in the budget and a clear process for approving variations. A fixed-price contract provides more certainty, but it is only as good as the specification behind it. If the scope changes, the contract price changes. Discuss with your builder and your broker how variations will be funded before they arise.

What is the role of the quantity surveyor?

Many commercial lenders appoint or accept a quantity surveyor to review the budget before approval and to inspect progress before each drawdown. Their report gives the lender confidence that the costs are realistic and the work matches the payment being requested. For borrowers, it is a useful discipline. The surveyor can also flag problems early, which is cheaper than finding them later.

How do I plan for the land and early costs?

The land purchase, approvals and early professional fees come before the first build payment. Some borrowers use existing land equity, some use cash and some use a short-term loan to hold the position. The structure needs to line up with the drawdown schedule so there is no funding gap. This is where early planning pays off, and where we spend a good deal of time with clients.

How do approvals and timing interact with finance?

Approvals sit on the critical path for any commercial build. Lenders generally want permits in place before the first drawdown, and they pay attention to conditions that could change the design or cost. If approvals are still pending when you sign a land contract, the finance plan needs to cover that waiting period and the risk that conditions alter the project. We map the sequence with clients: land, approvals, contract, first drawdown, completion and end loan. Seeing it on one timeline shows where the pressure points are.

What about energy, services and site costs?

Site costs often surprise first-time commercial builders. Connecting power, water and sewer, upgrading roads or drainage, remediating soil and meeting authority conditions can add substantially to a budget. A site investigation and early conversations with the relevant authorities help produce a realistic number. Lenders respond well to a budget that has clearly considered these items and poorly to one that has left them out.

Can I fund a fit-out as part of the loan?

Sometimes. Fit-out for the owner’s own use can be included in the budget with some lenders, while fit-out for a tenant may be funded by the tenant or by separate equipment-style finance. The treatment depends on whether the fit-out adds value to the building or belongs to the business. Raise it at the start so it is built into the structure rather than bolted on at the end.

Next steps

If you have a build planned or stalled, talk to us about your project. It is also worth reading about development finance if you plan to sell or lease what you build.