Business Loan for New Home Shop

goldenfab · Dec 28, 2017

I have a single member LLC and work out of my garage in a residential neighborhood doing prototype machine work as well as design work. I am outgrowing my garage so I bought 4 acres in a rural area to build a new house for my family and a detached shop for my business. I had planned to get a construction loan for the whole project. Plan is to do the building myself. After applying with a few banks and seeing how many hoops I have to jump through and not being able to qualify for the amount of the full project without selling my current house I am looking at alternatives. If I sell my house and live in a 5th wheel I think I can qualify for an unsecured personal loan for enough to build the house but not the shop. After the house is done I could then finance the house with a conventional mortgage and pull out enough money to build the shop.

Or... could I get a business loan to build the shop? The lot is zoned residential and its primary purpose would be for the house and me living there. I have talked to zoning and they are ok with me having a house/home business as long as no signs or increased traffic etc. If a lender is willing to loan my business the money are there any issues or things to be aware of using it to build a shop on my residential property. Assuming I got a business loan the business would not have the cash flow initially to make the payments so I would essentially make the payments from personal money.

ewlsey · Dec 28, 2017

Do it the other way. Get the loan to build a shop with your existing home as collateral. Build the shop and get it working. Then, sell the house and live in the trailer as planned. Use that money to build the house as needed.

I'm assuming you are a bachelor. No woman would approve any of these plans.

toolmaker96 · Dec 28, 2017

goldenfab said:
I have a single member LLC and work out of my garage in a residential neighborhood doing prototype machine work as well as design work. I am outgrowing my garage so I bought 4 acres in a rural area to build a new house for my family and a detached shop for my business. I had planned to get a construction loan for the whole project. Plan is to do the building myself. After applying with a few banks and seeing how many hoops I have to jump through and not being able to qualify for the amount of the full project without selling my current house I am looking at alternatives. If I sell my house and live in a 5th wheel I think I can qualify for an unsecured personal loan for enough to build the house but not the shop. After the house is done I could then finance the house with a conventional mortgage and pull out enough money to build the shop.

Or... could I get a business loan to build the shop? The lot is zoned residential and its primary purpose would be for the house and me living there. I have talked to zoning and they are ok with me having a house/home business as long as no signs or increased traffic etc. If a lender is willing to loan my business the money are there any issues or things to be aware of using it to build a shop on my residential property. Assuming I got a business loan the business would not have the cash flow initially to make the payments so I would essentially make the payments from personal money.

Couple of things.
1. Does it really matter, you are no doubt going to have to sign personally.
2. I doubt they would consider the building collateral, as the property under it is not owned by the business.
3. Just a thought, but why not build the shop on a personal loan (personal community property) & then rent back to your shop.

goldenfab · Dec 28, 2017

ewlsey said:
Do it the other way. Get the loan to build a shop with your existing home as collateral. Build the shop and get it working. Then, sell the house and live in the trailer as planned. Use that money to build the house as needed.

I'm assuming you are a bachelor. No woman would approve any of these plans.

This would be the best option for me, unfortunately zoning will not allow a structure to be built without a house. Technically I could permit both at the same time and happen build the shop first as long as the house gets built in the end. Problem is if I had to get a construction loan from a mortgage lender they don't like lending on anything but a vacant lot. So I suppose this could work if I was 100% certain I could qualify for the personal loan else I would leave myself in a bad place.

Wife and two kids actually. For some reason she is on board with living in a 5th wheel for a while.

toolmaker96 said:
Couple of things.
1. Does it really matter, you are no doubt going to have to sign personally.
2. I doubt they would consider the building collateral, as the property under it is not owned by the business.
3. Just a thought, but why not build the shop on a personal loan (personal community property) & then rent back to your shop.

1. My guess is they I might qualify for more $ or get a better rate since it is business? Maybe I'm way off on this assumption.
2. Probably right, the title for the property is in my name.
3. That is probably a good idea for tax reasons. Thanks!

toolmaker96 · Dec 28, 2017

goldenfab said:
This would be the best option for me, unfortunately zoning will not allow a structure to be built without a house. Technically I could permit both at the same time and happen build the shop first as long as the house gets built in the end. Problem is if I had to get a construction loan from a mortgage lender they don't like lending on anything but a vacant lot. So I suppose this could work if I was 100% certain I could qualify for the personal loan else I would leave myself in a bad place.

Wife and two kids actually. For some reason she is on board with living in a 5th wheel for a while.

1. My guess is they I might qualify for more $ or get a better rate since it is business? Maybe I'm way off on this assumption.
2. Probably right, the title for the property is in my name.
3. That is probably a good idea for tax reasons. Thanks!

Sorry to disappoint, but no chance do they look at a small business as more valuable, stable, etc. than an individual. After 17 years of being in business, I still have to personally sign on all bank loans/lines of credit. Bank wants my house & other personal assets if I F.U.
Only exception to this is machinery loans with machine tool finance companies. Shop has enough of a track record that using the machine as sole collateral is acceptable.

Chip Chester · Dec 28, 2017

On four acres, a pole-barn is not only an assumed thing, it's almost a requirement. Your house construction will go much smoother if you can store materials and equipment out of the weather during construction, so it is logical to build it first. What you do with the pole-barn after house construction, or how 'nice' it is in the first place, or what "business" you "sell" it to at the end shouldn't matter to the lender. Plus, if you sell the current house, you'll need somewhere for the stuff that won't fit in the 5th wheel.

Plus apparently you need to keep working at the biz while construction is underway? Being on-site of the construction will let you keep an eye on things efficiently. Perhaps divide house construction into two phases: Living quarters/kitchen/bath/bedrooms as phase one, then "close" on the house loan. Tap the new equity on the whole now-developed property as soon as possible for the two car garage, great room, enclosed patio/hot tub, landscaping/drives, and squash court.

Can you take a second on the current house, and then rent it out for profit? Leverage it and have someone else make the payments? Depends on local market, etc.

Around here, custom home construction companies will lend 100% for a house built on your land, making these type transitions a little easier. But you're not the builder then.

Chip

72bwhite · Dec 28, 2017

banks just don't like loaning money for construction
to owner builders without a contractor
notorious for running out of money half built.

build a very small house like 1 bedroom with huge garage shop

Zahnrad Kopf · Dec 28, 2017

ewlsey said:
Do it the other way. Get the loan to build a shop with your existing home as collateral. Build the shop and get it working. Then, sell the house and live in the trailer as planned. Use that money to build the house as needed.
I'm assuming you are a bachelor. No woman would approve any of these plans.

I thought the exact same. And then I was shocked a few days ago. This ( above ) is very close to ThePlan™ right now.

SND · Dec 28, 2017

Keep making $ out of the attached garage as long as you can and save up, grow the income, not the floor size just yet.
Building is gonna cost a lot more than you think, been there.
Also pretty hard to run a shop out of a 5th wheel if you sell your current spot I think.

gsg9.ca · Dec 28, 2017

It has to be easier/less risky to spend a few thousand to expand the garage than to get into a major construction project + moving. Plus what ever you do to your current home up's it's resale value in the future. I'm lucky to be in an area that has a fairly high vacancy rate so rents are fairly cheap. Personally I'd find it less stressful to be on the hook for $700-1000/month for a small space than to manage my own build + keep the business running.

WILLEO6709 · Dec 28, 2017

4 acres in the country that’s zoned? Surely has to be a better option- but not a zoning fan. The less rules the better

Bondo · Dec 29, 2017

I don't know if you make 10,000 a year now or 1,000,000. But what I would suggest is, can you afford to loose everything in a year if a "recession" were to happen within 1 year from this new loan.

If your more rural, keep looking to find a building with a house for sale. What I did was to purchase a nice shop on a residential property but the house was a complete POS. This allowed for it to be cheap, cheap taxes, and I can fix up the house how I want.

If you can't survive if a huge downturn were to hit, I suggest renting a building for a while this will help build up a relationship with the bank.

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Ries · Dec 29, 2017

Business loans are always higher interest, shorter terms (3 to 5 years is common) and harder to get. They usually want to see financials for 5 years in the past, along with 100 pages of other paperwork. I once got an SBA loan to buy a building- it was 3 months of paperwork and 200 pages of forms.

Its extremely unlikely you will find a bank to give you a loan like this. Might happen, but unlikely.

Banks hate anything weird.
In my area, they basically wont lend on farmland, raw land, or industrial land, unless you pay double the interest, and have huge assets- triple the value of what you want to buy, in the bank, is good for them.

what they like is a nice normal house on a half acre lot.
That, they can peg into a slot, and resell the loan in 3 months.

So- get a normal loan, build a house.
Once thats done, and you are just paying your monthlies, THEN you sneak in the pole barn.
It would be great if people gave small businesses money. No strings attached. But they dont.

wheelieking71 · Dec 29, 2017

Yea, you can pretty much forget about a "business loan".
They will loan you as much as you want, as long as you can secure it with cash.
Got $100k in the bank? You will be able to borrow about $100k.
Otherwise, its not happening. Anything you do now "in the beginning" will be on your individual.
The business has no clout yet.

What part of AZ?

countryboy1966 · Dec 30, 2017

I inquired about a business loan once. I was told by the bank to get a second job. :smoking:

Garwood · Dec 30, 2017

Why are choosing to build a pole building?

swatkins · Dec 31, 2017

Bought 25 acres with a double wide on it.. Made a deal to have a 40 x 40 metal building rolled into the deal. They gave me a construction loan to buy the property and have the building built then we rolled it over into permanent financing. Lived in the double wide while building my new house beside it, took a little over 3 years to finish it.

I sold the home we had in the city when we bought this place and had about 200,000 cash to build the new home. Problem was the wife wanted a lot nicer place than I had planned on so had to go to a bank for a 90,000 loan to finish up.

One thing the banks did not let me do was be the builder. Even though the house was almost complete they told me there was a law in Texas that prohibited me from being the builder and before they could approve the loan I needed to hire a builder.

I ended up "hiring" my 19 year old son as the "builder"

Lanso · Dec 31, 2017

Banks just don’t hand out money unless they are sure that you can make all your payments and that also protects you, this all sounds too risky.

goldenfab · May 15, 2023

PWalker said:
I'm kinda in the same situation. I want to expand my shop, but I need to apply for a loan. So, if you have any other tips, please share them.

I got a home equity line of credit (HELOC) on my last house to kick off building the shop. I then got a construction loan that rolled into a residential mortgage, I used that to finish the shop and build my house. Not many banks do construction loans and only a small fraction that dl will do owner builder.

I built a guest house in my shop that we moved into while building the house which allowed me to sell our last house. The town wanted me to get the house permit before the shop but they were ok with me finishing the shop first. I did the house footers first, then built the shop, then built the house.

If you can get a HELOC for what you need that would probably the best route to go. From my limited experience you probably won't find a better rate or easier loan. We got our HELOC from a credit union and it was super easy. The construction loan was a PITA but my banker was really good to me and everything worked out.

goldenfab · May 15, 2023

One thing to note about the construction loan I had is they had me do a line item budget and they didn't cut any funds for the line items until they were done and the bank inspected the work. This may not be an issue for someone using a contractor that doesn't get paid until work is done but I was doing the work myself and needed to buy materials. I had about 90k on credit cards at one point. It took carful planning and some extra savings but I was able to pay the cc bills in full each month.

Business Loan for New Home Shop

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