Construction Loan Structures for Business Owners

Building a new property through construction loans works differently to borrowing for something that already exists.

The money doesn't land in your account on day one. Instead, it gets released in stages as the build progresses, and the structure you choose determines how much control you have over cashflow, how much you'll pay in fees, and whether your builder gets paid on time. For business owners commissioning a new commercial premises, an investment property, or even a custom home, understanding these structures before you sign anything can save you tens of thousands of dollars and a lot of frustration down the line.

Progressive Drawdown: How the Money Actually Flows

Construction finance gets released in instalments tied to specific milestones in the build. You only pay interest on the amount drawn down at any given time, not the full loan amount. When your registered builder completes the slab pour, they submit an invoice and the lender arranges a progress inspection. Once approved, the funds for that stage get transferred to the builder. The same process repeats for frame erection, lockup, fixing, and practical completion.

Consider a business owner building a small commercial warehouse with a loan amount of $800,000. After the slab is poured, the builder claims $160,000. The lender inspects, approves, and releases that portion. For the next month, interest charges apply only to $160,000, not the full $800,000. By lockup, when $480,000 has been drawn, interest charges reflect that amount. This structure keeps early interest costs lower than a fully drawn loan, but it also means you're managing multiple drawdown requests and coordinating inspections throughout the build.

Most lenders charge a Progressive Drawing Fee each time funds are released. This typically sits between $300 and $500 per drawdown. Over five or six stages, that adds $1,500 to $3,000 to your total costs. Some lenders cap this at a fixed amount regardless of how many draws occur, which matters more on complex builds where additional progress payments might be needed.

Fixed Price Building Contract vs Cost Plus Contract

A fixed price building contract locks in the total build cost before construction starts. Your builder quotes $750,000 to complete the project, and barring variations you request, that's what you pay. The lender assesses this contract, values the finished property, and approves funding based on those figures. The progress payment schedule is usually predetermined and tied to standard stages.

A cost plus contract operates differently. The builder charges their actual costs plus a margin, typically 10-15%. You might agree on an estimated cost, but the final figure depends on what materials and labour actually cost during the build. This structure offers more flexibility if you want to make design changes mid-project, but it introduces uncertainty for lenders. Many won't lend on cost plus arrangements at all, and those that do often require larger deposits or apply higher rates.

In our experience, business owners who want custom design and aren't tied to a rigid budget sometimes prefer cost plus, but securing construction funding becomes harder. Most lenders want the certainty of a fixed price contract with a registered builder before they'll approve the loan. If you're building an investment property or commercial premises where the numbers need to stack up from day one, fixed price contracts make the finance application far more straightforward.

Progress Payment Schedule: Aligning Builder Expectations with Lender Approval

Your builder expects to be paid as work progresses, usually at five or six stages. The lender needs to verify each stage is complete before releasing funds. The gap between those two processes is where problems occur. A builder submits an invoice for the frame stage. The lender arranges an inspection three days later. The inspector raises a question about bracing that takes another two days to resolve. By the time the funds hit the builder's account, a week has passed. If your builder has already paid subcontractors or suppliers and is waiting on your drawdown to cover those costs, relationships can get tense.

Some builders factor this delay into their cashflow. Others don't. Before you commence building within a set period from the Disclosure Date, confirm how your builder handles the timing gap between claiming payment and receiving it. Some will start the next stage while waiting for payment. Others won't. On a four-month build, even small delays at each stage can stretch the timeline significantly, which affects your interest-only repayment commitments and potentially your end use of the property.

A land and construction package often requires council approval and a development application before construction funding can be finalised. If you're purchasing suitable land and building on it as a single transaction, the lender typically settles the land component first, then activates the construction facility once council plans are approved and your registered builder is ready to start. You'll pay interest on the land portion immediately, but the construction portion only draws down as the build progresses.

Construction to Permanent Loan: One Application, Two Phases

Most business owners don't want to arrange construction funding, then refinance into a standard loan once the build finishes. A construction to permanent loan handles both phases under one approval. During construction, you make interest-only repayments on whatever's been drawn. Once the build reaches practical completion and the lender conducts a final valuation, the loan converts to principal and interest repayments based on the full loan amount.

As an example, a client building a duplex as an investment property secures approval for $900,000. During the six-month build, they pay interest only on progressive drawdowns. At completion, the loan converts to a standard investment loan with principal and interest repayments over 30 years. The interest rate during construction is often slightly higher than the ongoing rate, but the difference is usually marginal and the convenience of a single application outweighs the minor cost.

The alternative is arranging short-term construction funding, then applying for a separate home loan or commercial loan once the property is finished. This approach doubles your application work, incurs two sets of establishment fees, and introduces the risk that lending conditions tighten between your initial approval and your refinance application. Most business owners avoid this unless they have a specific reason to split the funding, such as using different security properties for each phase.

Progressive Payment Schedule and Paying Subcontractors

When your builder engages plumbers, electricians, concreters, and other subcontractors, they typically pay those trades before claiming the progress payment from you. On a fixed price building contract, your builder wears the risk of coordinating payments to subcontractors and managing their own cashflow. You pay the builder according to the agreed schedule, and the builder handles everything downstream.

On projects where the business owner acts as an owner builder, the responsibility shifts. You're claiming the drawdowns directly and paying subcontractors yourself. This can reduce costs because you're not paying a builder's margin, but it also means you're managing the progress inspection process, ensuring each trade is paid on time, and dealing with the lender's requirements for evidence of payment before the next drawdown is released. Owner builder finance is harder to secure, and lenders usually require more documentation and charge higher rates to offset the increased risk of delays or incomplete work.

For a business owner without construction experience, taking on the owner builder role to save 10-15% on the build cost often isn't worth the time, complexity, and funding challenges. The construction loan interest rate you'll access as an owner builder will likely be higher than what you'd pay with a licensed builder managing the project, which erodes much of the saving you were aiming for.

Call one of our team or book an appointment at a time that works for you. We'll walk through your specific build, explain which structure suits your timeline and cashflow, and help you access construction loan options from banks and lenders across Australia without the runaround.

Frequently Asked Questions