Choosing financing options for your business
With the seasonality of most of the painting industry, it is not surprising that many businesses feel the pinch of slow cash flow and a smaller-than-comfortable amount of cash in the bank at some point or another. This is the time when you wish you had access to more working capital or credit. What are some of the ways that you can get access to funds when you need them? What considerations do you need to keep in mind when looking for funding?
One of the most common ways that businesses obtain funding is from the owner’s personal funds, when this is a possibility. This is not necessarily a bad idea, but there are good and bad ways to go about it.
BUSINESS CREDIT VS PERSONAL CREDIT
Many small businesses start out as a sole proprietor (Schedule C) business, but it’s a better idea to create a formal business entity. Most contractors choose to set up their business as either an S corporation or an LLC, because this gives the business owner a shield in terms of personal risk. This shield can be compromised by mixing personal and business finances—so it is prudent to keep separate bank accounts and credit card accounts for your business.
Rather than using personal credit for your business, consider lending money to your business if it needs a cash infusion. Treat this like any other short- or long-term loan on your balance sheet and make repayments. In some cases, you may need, or want, to charge interest to the business for the use of your money.
CREDIT FROM BANKS
Credit from banks most commonly takes two forms: business credit cards and business lines of credit. When you are starting out or expanding, you may also qualify for a Small Business Administration (SBA) loan.
Apply for business credit before you need it. Most contractors have a busy season and a slow season. Your slow season is typically when you need to dip into your credit. I recommend building a relationship with a business banker as a resource; apply for a business line of credit when you are in your busier season and can show profitable results. Most bankers will want to look at your financial statements, so it is good to provide a well-organized Income Statement (P&L) and Balance Sheet, and to be conversant with your financial results. If you have a budget and can show that you are meeting or exceeding your plan for this year and the prior year, that can be helpful. Banks like to lend to businesses that are making money and growing.
In some cases, lenders do require a personal guarantee on credit cards or lines of credit for the business, so be aware of that.
If you need to purchase big-ticket items like equipment, it’s wise to explore options for equipment loans versus using your business credit card or line of credit for this type of expense. Often, you can get better terms for this type of financing through companies who specialize in this service, and you don’t tie up your other resources in the process.
If your bank can’t help you, there are other lenders who are willing to lend to businesses that have short-term difficulties or have special circumstances that make traditional bank lending not an option. Your business banker, CPA, business coach or advisor may have referral contacts for alternative lenders.
To summarize, keep three things in mind: Educate yourself on your options, develop a relationship with a good business banker, and apply for credit before you need it.
Linnea Blair, owner of Advisors On Target, is a business coach and small-business expert. She works with contractors to develop best-practice business management and marketing strategies for a sustainable business. She can be found at AdvisorsOnTarget.com