<p>In the United States construction loans often work this way:</p>

<blockquote>
  <p>Once approved, the borrower will be put on a bank-draft, or draw,
  schedule that follows the project's construction stages and will
  typically be expected to make only interest payments during
  construction. As funds are requested, the lender will usually send
  someone to check on the job's progress.</p>
</blockquote>

<p><a href="http://www.bankrate.com/finance/real-estate/how-do-home-construction-loans-work.aspx#ixzz3xzHrOkUf" rel="nofollow">How do home construction loans work? By Steve McLinden • Bankrate.com</a></p>

CC BY-SA 3.0
2016-01-22T15:54:55.493Z
Thanks for the response and link. I'm accepting Alecos' answer because he was first.
Dave
CC BY-SA 3.0
2016-01-22T15:30:00.230Z
2016-01-22T15:30:00.230Z
BKay
<p>Handing out the principal amount of debt gradually, in increments, is standard practice in investment loans extended by a bank to a corporation.  </p>

<p>The rationale is clear : the corporation wants to make an investment, say a new factory. The whole plan is laid out and the cash flows of the pre-operational, construction period are also detailed, based on forecasts or specific agreements with the suppliers (contractors etc) that will be involved. The bank checks and accepts all these, but it also wants to see the corporation deliver (both the corporation's part in the financing but also as regards the actual build up of the investment).  </p>

<p>So specific milestones are agreed between the two parties, and to each milestone a round of financing is agreed (these milestones become contracutal obligations, legally binding). Milestones usually include specific technical phases of the build up to be accomplished (say, the building's foundations are complete, or the power infrastructure has been installed, etc). </p>

<p>In this way risk is reduced without hurting the necessary cash flow for the project. It also reduces the interest burden for the firm.</p>

CC BY-SA 3.0
2016-01-22T15:54:21.320Z
Is there a particular name for this style of loan?
Dave
CC BY-SA 3.0
2016-01-22T16:13:07.833Z
@Dave It is usually a bond loan.
Alecos Papadopoulos
CC BY-SA 3.0
2016-01-22T15:10:09.533Z
2016-01-22T15:10:09.533Z
Alecos Papadopoulos
<p>Not sure if this is the right place for this question but it's more of a theoretical finance question than a personal finance question.</p>

<p>So a loan has a principal amount that is given to the borrower in a lump sum, and the borrow then pays back that amount plus some interest. For example, let's say that George loans \$100 to Fred at 10% interest over 10 months. Fred then pays back at \$11 a month and is debt free at the end 10 months.</p>

<p>Is it ever the case that George lends the money in increments instead of a single lump sum? That is, George pays Fred \$20 a month for five months, while at the same time Fred pays back at \$11 a month for 10 months. </p>

<p>I ask because this would be less useful to Fred but less risky to George.</p>

CC BY-SA 3.0
2016-01-22T14:12:35.123Z
What are the economic principles you are asking about?
410 gone
CC BY-SA 3.0
2016-01-22T14:26:54.990Z
Sorry, I meant the principal, as in the amount owed: http://www.investopedia.com/terms/p/principal.asp
Dave
<interest-rate><investment><debt><risk>
Is the loan principal ever delivered in pieces over time?
Dave
# Is the loan principal ever delivered in pieces over time?

(Asked by: username_0 on 2016-01-22)

Not sure if this is the right place for this question but it's more of a theoretical finance question than a personal finance question.

So a loan has a principal amount that is given to the borrower in a lump sum, and the borrow then pays back that amount plus some interest. For example, let's say that George loans \$100 to Fred at 10% interest over 10 months. Fred then pays back at \$11 a month and is debt free at the end 10 months.

Is it ever the case that George lends the money in increments instead of a single lump sum? That is, George pays Fred \$20 a month for five months, while at the same time Fred pays back at \$11 a month for 10 months.

I ask because this would be less useful to Fred but less risky to George.

**Tags:** interest-rate, investment, debt, risk

> **Comments:**
> **username_1**: What are the economic principles you are asking about?  
> **username_0**: Sorry, I meant the principal, as in the amount owed: http://www.investopedia.com/terms/p/principal.asp  

---

## 2 answers

### Answer by username_3 on 2016-01-22. Score: 6 | Accepted answer

Handing out the principal amount of debt gradually, in increments, is standard practice in investment loans extended by a bank to a corporation.

The rationale is clear : the corporation wants to make an investment, say a new factory. The whole plan is laid out and the cash flows of the pre-operational, construction period are also detailed, based on forecasts or specific agreements with the suppliers (contractors etc) that will be involved. The bank checks and accepts all these, but it also wants to see the corporation deliver (both the corporation's part in the financing but also as regards the actual build up of the investment).

So specific milestones are agreed between the two parties, and to each milestone a round of financing is agreed (these milestones become contracutal obligations, legally binding). Milestones usually include specific technical phases of the build up to be accomplished (say, the building's foundations are complete, or the power infrastructure has been installed, etc).

In this way risk is reduced without hurting the necessary cash flow for the project. It also reduces the interest burden for the firm.

> **Comments:**
> **username_0**: Is there a particular name for this style of loan?  
> **username_3**: @username_0 It is usually a bond loan.  

---

### Answer by username_2 on 2016-01-22. Score: 2

In the United States construction loans often work this way:

> Once approved, the borrower will be put on a bank-draft, or draw,
> schedule that follows the project's construction stages and will
> typically be expected to make only interest payments during
> construction. As funds are requested, the lender will usually send
> someone to check on the job's progress.

[How do home construction loans work? By Steve McLinden • Bankrate.com](http://www.bankrate.com/finance/real-estate/how-do-home-construction-loans-work.aspx#ixzz3xzHrOkUf)

> **Comments:**
> **username_0**: Thanks for the response and link. I'm accepting Alecos' answer because he was first.  

---

