The United States is home to some 30.5 million small businesses, with “small business” being defined as an enterprise with under 500 employees and often no more than a certain amount of yearly revenue. These small companies make up 99% of all American businesses, and they employ around half of all Americans and create 60% of the jobs out there. All together, these small businesses are a significant part of the American economy, but they typically need loans to keep operating. Many small businesses, especially younger ones, rely on the likes of inventory financing, payroll funding, marketing funding, and consolidation loans (among others) to remain operational and maintain healthy cash flow. Most small businesses are only marginally profitable, and many are in debt until they can grow past a certain point and become profitable consistently. How does inventory financing work, and when is it time for invoice factoring or contractor funding for construction?
Inventory Financing Basics
In short, inventory financing described when a company (often a retailer of some sort) borrows enough money to purchase items to sell to customers, or inventory. In short, the company takes out loans to buy enough stock to sell for a profit. Why might a company need to do this? Inventory financing is essential, for example, if the small company has a very short time frame for repaying suppliers and cannot sell those products to customers before then. In other cases, inventory financing is vital if the retailer experiences seasonal fluctuation in sales and customer interests, so loans can help protect the company from the ill effects of disrupted or unpredictable cash flow. Or, during a busy holiday season, the company can perform inventory financing to offer a lot of goods for numerous customers and sell more items overall.
It may also be noted that such loans are fairly attractive to the lenders, since the inventory itself will serve as collateral, and thus make it a secured loan. This will be relevant if the borrower fails to sell enough of the inventory. What is more, these loans are often easier to acquire than large, up-front loans from bigger lenders such as big banks, in contrast to huge retailers such as Target, Walmart, and Macy’s, which are more attractive to big lenders. Finally, when the small company’s owner applies for an inventory financing loan, the lender will look into the borrower’s personal and business credit scores, and check their financial history for red flags (such as defaulting on loans). Other factors for the inventory financing will be considered too, such as costs for shipping and handling, the borrower’s ability to reliably sell the inventory, theft and loss provisions, and the like. The exact terms of the collateral may vary, too.
Small Business Loans for Construction Company Work
Meanwhile, what about the world of construction loans? A typical construction project may involve more than one company, all pooling their resources to make a building. A lot of paperwork is involved in this, covering everything from loans to personal injury liability to the schedule, and construction company loans are a peculiar topic. Unlike many other loan types, a construction loan (even a smaller one) will not be an up-front lump sum. Also bear in mind that even relatively small construction loans may total a few million dollars.
Instead, once a construction loan is approved, it will be broken up into pieces, and given to the lender one at a time. As each phase of the construction project is completed, inspector agents will visit the site and give their approval, and then another piece of the loan is given. This will be done repeatedly until either the project is complete, or it is canceled. If the project is terminated, then the borrower only has to pay interest for the loan pieces already given, not the entire sum. It would not make sense to pay interest on money that was never borrowed, after all.
If the project is indeed completed, then the construction company will have to pay back the full loan. To do this, the construction company will take out a mortgage on the new building equal to the loan’s value, then pay off that mortgage in installment payments. Thus, the large construction loan is indirectly paid back.