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How Businesses Make Loans

Most businesses in the United States today are on the smaller side, and by definition, a small company is one with under 500 employees. This describes nearly 99% of all American companies, and they have some things in common. For example, these small companies tend to have limited profit margins, especially when they are newly formed, and this can result in some cash flow problems. To fix this, companies can take out business loans of all sorts, such as working with inventory financing companies, restaurant funding options, law firm funding, and even small loans for a construction company. Big banks are often reluctant to make loans to companies that may or may not survive, but more specialized lenders may offer fair terms for loans, such as inventory financing companies or medical practice loans firms. How might this work?

Business and Borrowing

Not all of today’s business owners are handling their finances correctly. A business has its own credit score independent of personal credit scores, and a better business credit score means better odds of getting loans approved. However, some companies have bad credit scores, and 45% business owners are not even familiar with the concept at all. Meanwhile, big banks are often reluctant to offer loans to smaller companies, such as truck carrier firms or new restaurants. Only around 26.9% of small business loans are approved by banks, while alternative lenders approve around half of all requested loans that small companies ask for. What is more, over half of small business owners, around 60%, admit that they don’t feel knowledgeable bout accounting or finances, and many small companies suffer cash flow issues that may drive them to bankruptcy.

The good news is that any savvy small business owner may turn to specialized lenders for help, such as inventory financing companies or construction loan companies.

Getting a Loan

These specialized lenders have standards, to be sure, but a small company may find it much easier to get loans from these firms than from big banks. An example may be inventory financing companies, which offer loans for businesses that must purchase a lot of inventory from their suppliers. This is most helpful if the small company has to repay the supplier faster than they can sell the inventory, so inventory financing companies can smooth out that cash flow issue. And the supplies themselves may act as collateral in case the company fails to make proper sales.

That’s not all. The modern construction industry is a truly vast one, and it costs a lot of money for construction crews to launch and finish a project. Even the smaller construction loans may be for a few million dollars, and typical construction companies certainly will not have that kind of cash in their pockets. Rather than borrow money from banks, the companies involved in a construction project may take out loans from specialized construction lending firms.

This is not an ordinary loan. In fact, the construction crew taking out this loan will not even get the full amount right away. Instead, this loan is divided into pieces, which are doled out as the construction project progresses. The borrower may get the first segment of the loan, and use it to finance the project’s first phase. For example, digging the foundation and pouring concrete. Inspectors will look over the construction site, and if they approve of what they see, another piece of the loan is given. The process starts again, where another phase of the project is completed and the lender inspects it to approve it. This may take place several times until the project is finished, and the full amount of cash has been lent.

It may be noted that if the project is canceled partway through, the borrower will owe interest payment only on the money that has been lent so far, not on the grand total. What is more, the construction company needs to pay back the loan once the project is complete, but that is expensive. So, the construction firm will take out a mortgage on the finished company equal to the borrowed money’s total, and pay it off in installments. This is a go-between for the construction company and the lender, a practical solution for each party.

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