This is an unconventional article on a conventional topic – getting loans. Without knowing your business situation I will assume using cash instead of borrowing is an option.
Here was my first lesson in small business finance - cash is your rarest resource and only use it to (1) buy an appreciating asset (building) or (2) something that generates revenue (new equipment). Otherwise do you need it? If the answer is yes, look at your financing options.
Start with a business credit card
The first question is a business or personal loan? This is based on your business entity. If you are reporting to the IRS as a sole proprietor, then the choice is personal because it is not considered a business by many lenders. Subchapter S, LLP’s (Limited Liability Partnerships), LLC’s (Limited Liability Companies), and Chapter C corporations should go the business route otherwise you are guilty of doing what incorporation is trying to avoid, comingling business and personal finances.
Establish a line of credit
The next question is the purpose of the loan. Is it to purchase something or used to ensure cash on hand? If the issue is having enough money during the seasons of low revenue, consider a line of credit. Determine how much money you need to get through these periods and go to your bank or lending institution to apply. What makes this interesting is the flexibility, a set amount to be spent as you choose. The smart move is to keep it close to zero during the fat months so you can draw upon it during the lean.
Take manufacturer leasing if you can get it
If you are seeking a loan to acquire equipment, instead of owning it why not lease? Some of the best deals can be found with manufacturer leases. They want to move inventory and will do deals that lower either its purchase price or offer you better interest rates. This also allows you to walk away and not deal with selling used equipment.
Make your loan payments early
The third question is your credit rating or ability to take on more debt. If you don’t have any credit, then it may be smart to get a loan even if you don’t need it, in fact when you don’t need it is the perfect time. Never go to a bank or lending institution when you’re desperate, start small when you don’t need a loan so when the day comes, and it will, you have a relationship and track record to build on. BTW a good credit score adds value to the business.
This is a jumble of different options that all have strengths and weaknesses. The ones I favor are leasebacks and asset-based loans. A leaseback is where you sell the asset then lease it back for a predetermined period. You wind up with keeping the equipment, just paying more than planned. Your ticket with bad or no credit are asset-based loans. Instead of a signature loan based on your track record, use assets as collateral for the loan. This is the easiest to get because the lender is taking no risk - you don’t pay they take the truck.
I didn’t hit on borrowing from friends and family. I figured you have already exhausted this avenue and avoid parties and family get-togethers.
Editor’s note: The is the sixth article in a 10-part series that focuses on financing for landscaping business owners of all sizes. Part 5 covered the management of cash flow. This article reviews the process of obtaining loans, credit or alternative financing.