Most businesses today operate because of loans, both small and large companies alike (especially smaller ones). A business may need a few years before it becomes profitable, and until then, it may largely rely upon loans to stay afloat. Big banks are one option, but they are somewhat strict about how they offer loans. So, payroll funding, small business loans for construction company work, medical practice loans, law firm funding, and more can be done through specialized lending services that are not as strict as the banks are. A payroll funding company may help a business provide salaries and wages for its workers, and without a payroll funding route, a company may struggle to keep its employees. A construction company, meanwhile, might rely on not only payroll funding options but also specialized construction loans to keep a project going. How does this work?
On Loans
For context, many businesses have cash flow problems, and nearly 82% of businesses fail because of cash flow issues. What is more, a business might have a poor credit score and have trouble securing a loan, and nearly 45% of business owners don’t even know that the concept of business credit scores exists. Meanwhile, big banks are often reluctant to lend cash to businesses, and they only approve around 26.9% of small business loans. By contrast, alternative lenders approve close to 56% of loans. This includes construction loans, medical practice loans, and even truck loans.
A Construction Project and Loans
By no means is it cheap to build something, and construction companies often rely on loans so they can fund a project and see it through to the end. Today’s apartment buildings and hotels, offices, schools, banks, libraries, and more need to be built just right, and a project’s budget may far exceed what a company can provide out of pocket. Bank loans might be difficult, so a construction company (or several of them) will pool their resources and apply for loans to fund that project.
When it comes to construction loans, there are some unique differences from personal loans from a bank. When a construction company gets a loan approved for a project, not all of the money will be given right away. Instead, the loan is divided into a number of segments, and these pieces of the loan will be given as the construction project proceeds. The lender might get one piece of the loan, and use it to fund and complete the construction project’s first phase, such as excavating the foundation and pouring concrete. Once this is done, inspectors will look over the construction site, and if they like what they see, the next piece of the loan will be given.
In short, the construction project must show that it has earned the next piece of the loan, and inspection agents will ensure that the project is going smoothly. The construction crew may next set up the I-beams, put in the plumbing and electrical wires, install fabricated walls, and more. Each time, more of the loan is given until the project is complete, and the full loan has been given.
It may be noted that at any phase of this work, the construction company will only be asked to pay interest on the loan pieces that it has so far received. If the project is canceled or something goes wrong, the construction company will not have to pay interest on the loan segments that it has not yet received. This makes for a fair safety net if the project goes wrong.
If the project is indeed finished, then the construction company will owe a lot of money back, since construction loans can be large. They may be worth a few million dollars, quite a sum to pay back. Rarely, if ever, can a construction company so casually pay that back so soon, so mortgages will enter the picture. How does this work? Rather than pay back this huge debt (plus interest) right away, the construction company will take out a mortgage on the building that they just finished, equal to the loan debt’s sum. Now, the construction company pays off that mortgage in installments, with that mortgage acting as a go-between for the construction company and the original lender.