© Fergregory | Dreamstime.comCredit is the oil that lubricates the machinery of business. Whether it’s a loan to buy inventory or supplies, to support expansion, an equipment purchase or just to meet payroll or other operating expenses, most landscapers need to depend on credit at some point.
Unfortunately, the upheaval in today’s economy has resulted in a credit crunch that seems to have made it tougher than ever for business owners to swing a loan. In a recent survey, half of Lawn & Landscape readers said they were having trouble getting financing for their business.
Still, for those in the know, there are enough options available to make the task a little easier. Money may be tight, but business loans are being made every day to those who know how to ask.
“In today’s banking climate, good deals still get done, but with more equity, more collateral and much higher credit scores required of the borrower than in the past,” says Linda Feltman, senior business consultant at Pennsylvania State University, Small Business Development Center.
If you’re looking for financing for your business, now or in the future, here are some choices – and some hints on how to greatly improve your chances of coming away with the money you need.
The first place most landscape contractors turn when they need a business loan is their local bank. That’s why it’s essential to build a solid business relationship with your bank well before you need to ask them for money. Allowing your bank to become familiar with your business sets the stage for the time when you need to ask for a loan.
“The news media tends to lump all banks together when it comes to tight money,” says Bob White, president of Abington Bank, Jenkintown, Pa., “but there are big differences among banks. Like many other small community banks, we have always followed conservative lending practices. As a result, our default rates haven’t suffered and we’re in the same healthy position for making loans now that we were two years ago.”
Even after establishing a relationship, some business owners meet with frustration when the bank turns down their loan application. Most bankers agree that this is often because the owner has failed to come prepared with the information a lender needs to make a positive decision.
“How to find the money to finance an expansion or acquisition is the last thing that many business owners think about when they plan a project,” says James G. Marshall, vice president, Fulton Bank, Lancaster, Pa. “It’s best to have a team lined up behind you when you plan a major financial move – and your bank should be a member of that team.”
How should you prepare for a meeting with a bank loan officer? Marshall suggests that you come armed with:
- Financial statements for your existing business
- Accountant-prepared financial and cash flow projections
- Marketing feasibility study for the project
- The owner’s financial statements and tax returns
- Information on the owner’s background and experience in the industry
“With this information,” says Marshall, “the bank can give proper consideration to your loan application.”
Be careful to avoid the red flags that may raise concerns in the mind of a loan officer. “One of the things that would turn me off,” says White, “is an applicant who has over-leveraged himself or recently financed the purchase of an expensive asset. And, of course, it’s absolutely essential that the applicant be honest and up-front with all pertinent information.”
And if they say no?
When your best efforts fall on deaf ears at your local banks, all is not lost. Here are some alternate sources of business financing that may meet your needs:
State Government Programs
Most states have loan programs designed to provide small business financing. Some of these programs provide loans at lower than market interest rates, provided the business will create jobs in the state.
Some states have partnered with local banks in lending arrangements designed to attract, retain and expand businesses. Typical of these is a partnership between the state of Ohio and Huntington Bank. It has provided more than 2,000 small- and medium-sized Ohio businesses with loans totaling $465 million.
For information on small business financing programs in your state, contact the office of your state representative or state senator.
Federal Government Programs
The federal government also has loan programs available to assist small business owners. The most popular of these is the U.S. Small Business Administration’s guaranteed loan program, which guarantees as much as 80 percent of the loan principal. This program gives your bank an incentive to lend to a borrower who does not otherwise meet the bank’s lending guidelines.
Other SBA loan programs available to small business owners is the 504 loan. Established in 1980, the 504 Loan Program provides long-term, fixed-rate financing for major fixed assets, such as real estate or facilities construction or expansion.
If you decide to seek an SBA loan, your best bet is to work through a certified or preferred lender. The process is rather complex, so you want a lender who has experience working with them. To find certified or preferred lenders, visit the SBA Web site – www.sba.gov – or call your local SBA office for guidance.
SBICs are private investment firms licensed by the SBA to provide investment financing and long-term loans to small businesses. Some SBICs make only equity loans, others provide debt loans, and some provide both. As a rule, SBICs will require the same level of collateral and credit ratings as banks.
For information on how to contact an SBIC, check with your local SBA office or log on to www.sba.gov/inv/.
Your local chamber of commerce or other business groups may have some revolving loan funds available to businesses specific to your community. Generally, these funds come from local resources and have specific guidelines for their use.
Begin by contacting the director of your local chamber of commerce to see what help might be available for the specific purpose you have in mind.
Angel Investors. When conventional financing options seem out of reach, many business owners have had success seeking out individuals or commercial lenders willing to invest in a business expansion, either with debt financing or by taking an equity position in the business.
When you find an “angel” investor, you’ll probably find that this option is more flexible than a bank loan or government program, but it also comes with its own risks.
If you don’t know anyone with the economic firepower to fund your loan, don’t give up. There is an entire industry of professional investors looking for opportunities to invest in growing businesses.
Keep in mind, though, that unless you’re willing to give up an equity position in your business, working with a professional investor is not for you.
When All Else Fails
Depending on the size and economic health of your business, the only source of expansion money available to you may be what you can dig up on your own. It’s a common route pursued by entrepreneurs, but be advised, that each of these money sources carries special risks.
Friends and Family Members
If you have a friend or family member able to help finance your growth, you may find this to be the easiest type of loan to obtain.
But use caution. Most financial experts agree that mixing business and personal relationships can lead to destructive problems in both your business and personal life. If you do take a loan from a friend or family member, make sure that all details are carefully spelled out in a written contract so both sides understand repayment terms.
Credit card financing. If your needs are modest, you may already have credit cards with lines of credit substantial enough to fund all or part of your financing needs.
While it can be tempting to simply charge everything, this is arguably the riskiest and least desirable of all financing methods. The burdensome interest rates charged by credit card issuers these days can become impossible to meet if your business hits even a minor bump in the road.
The result could be a severely damaged credit rating – or even the loss of your business.
Businesses will always need some form of credit to operate, and a creative entrepreneur has many options available to him when it comes to raising capital. But, however you decide to raise money for your business, a thorough and detailed business plan is the key to securing the safest and most-desirable types of financing.
Banks, SBA loan officers and your brother-in-law all want to have concrete evidence that your company will continue to grow – and that you’ll be able to pay back what you want to borrow.
The author is a freelance writer based in Abington, Pa.