LOANS, SELF-FUNDING, AND INVESTORS PROVIDE CAPITAL FOR EXPANSION.

Growing a business can be a bit of a Catch-22 – a seemingly impossible situation because additional trucks and equipment will generate more revenue, but there are no funds to purchase the additional trucks and equipment. Fortunately, there are a number of different options for contractors who need additional funds to support growth.

The most common reasons that owners of plumbing-heating-cooling contracting companies seek additional funding are to buy a building, purchase expensive equipment, add new or replace older trucks, and have access to funds to cover expenses during emergencies or to manage the normal ups and downs of cashflow, says Ruth King, owner of Business Ventures, a consulting firm focused on helping contractors succeed. King also is known as PHCC’s resident "profitability master," has led its in-person PHCC Finance Bootcamp sessions, and will serve as a speaker at PHCCCONNECT2023.

Doing Your Homework

While there are different sources of funding for owners to consider, there are some basic financial records that must be available, says King. "You must be able to provide good financial statements that show two or more years of profit," she says. These records include a profit and loss statement, a balance sheet, and a cash flow statement, which are the three financial statements that work together to measure a business’s financial health.

It is also important to define your needs clearly to better identify the best option and to show the bank, credit union, or private investor how the funds will be used and how the business will be improved.

Securing a Loan

"A line of credit is one type of loan that many small business owners like to – and should – have for their business, but it should be established before there is a need," says King. "The line of credit can act as a short-term loan to cover unexpected expenses, and it does help owners sleep better at night."

The best use of a line of credit is to pay all or the majority of the loan within 30 days with revenue generated by steady income from maintenance plans. Relying on a line of credit for long periods is expensive and limits the availability of funds for future emergencies.

When contractors need loans for major purchases such as equipment or buildings, the most common source of funding is Small Business Administration (SBA) loans, says King. "The owner goes through a bank or credit union to apply for the loan and provides financial statements and other documentation," she says. Because not all financial institutions offer SBA loans, it might be necessary to open an operating account at a different bank or credit union than the business uses daily. "It is best to use a Tier 1 bank or credit union with a lot of experience with SBA loans because they understand what is needed and can streamline the process," she says.

"A line of credit is one type of loan that many small business owners like to – and should – have for their business, but it should be established before there is a need. The line of credit can act as a short-term loan to cover unexpected expenses, and it does help owners sleep better at night."

∼ Ruth King

Types of SBA loans include:

• The 7(a) Loan Program is SBA’s most common program and can provide up to $5 million that can be used for short- and long-term working capital, refinancing current business debt, purchase and installation of equipment, and purchase of furniture, fixtures, and supplies. Funds also can be used to purchase real estate including land and buildings and to construct a new building or renovate an existing building.
• An SBA microloan provides up to $50,000 and can be used to repair, enhance, or improve a small business. Typical uses include working capital, inventory, supplies, machinery, and equipment. Microloan funds cannot be used to pay existing debts or invest in real estate.
• The CDC/SBA 504 loan program provides SBA loans to small businesses looking to purchase or build owner-occupied commercial real estate. The program pairs two lenders together to fund these projects: a bank or traditional lender and a community development corporation (CDC). The bank lends up to 50%; the CDC lends up to 40%; and the remainder of the project’s costs come from the borrower, typically in the form of a cash down payment. The business is required to occupy at least 51% of the commercial space.

Another source of funding is a conventional loan from the bank or credit union with whom you have a standing relationship. "You should also compare loan offerings from other community banks or local institutions and look at interest rates and origination fees to determine the best offer," says King.

"Family members may also be a source of loans, but I would be very careful to put up guardrails to protect you, your business, and your relationship with family members," says King. These "guardrails" include creating a loan document that specifies the terms of the loan, interest rate, payback period, and responsibilities of each party.

Seeking Investors

In addition to securing a loan to fund an expansion or new equipment, seeking outside investors can be an option for some contractors. Angel financing happens when individuals or groups of individuals invest their own money in a business. Larger investments by equity groups are more likely to occur with businesses that have several locations and plans to expand even more.

There are pros and cons to seeking outside investors. Investors can immediately enhance cashflow, bring additional expertise and connections to the table, and support faster growth. However, investors often expect to have a say in the business, much like a business partner. Contractors also will feel more pressure to make a profit to keep the investor from losing money. There is also the possibility of less profit for the owner as the investor takes a share of the profits, leaving less for the contractor.

Planning Ahead

Preparing for future investments to expand the business also can include plans to self-fund some purchases, King says. "An owner can set up a couple of business savings accounts that can be used to loan funds to the business for specific reasons," she explains. "If $25,000 is borrowed to purchase new equipment, then schedule payments from operating income to pay the loan back." These self-loans don’t require applications, interest, or origination fees … just planning well ahead to build up the savings account.

Planning ahead also involves establishing a relationship with a financial institution, King suggests. "You don’t want to wait for a crisis to search for funding, so share information with your banker to demonstrate your company’s financial health," she says. "If you have someone who understands your goals, financial status, and needs, it will be easier to begin the loan application process and to get advice to help your business grow."

Source:

BY SHERYL S. JACKSON

Sheryl S. Jackson is a freelance writer and editor who specializes in education, leadership, and legislative topics for several industries, including construction.

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