There are plenty of options for borrowing money for business needs, but knowing which to choose can be a challenge.
Business owners often look to bank loans and lines of credit. With a fixed loan, the borrower is given a specific amount of funds for a certain amount of time, sometimes at a fixed rate of interest. Alternately, a line of credit provides a set amount a business can borrow from and pay back as needed, somewhat like having a credit card.
Michele Gill, business manager with Elite Pools in Lake in the Hills, Illinois, has gone this traditional bank route. “The pros of bank loans and traditional financing are that the interest rates are based on the market and not on the whims of predatory lenders,” Gill says. “The terms are often more palatable for business owners, such as monthly payments with reasonable amounts over longer periods of time. This helps a business manage cash flow and repay the funds without cutting too far into profit margins and operating funds.”
For John Rangel, owner of Clearline Pools in Redwood City, California, credit has become the go-to option. “What works best for us is setting up a credit line with a corporate credit card and/or working with a venture bank that offers a variety of funding methods and tends to work with companies that have strong potential for growth and profitability,” Rangel says. “The amount of money needed is the key factor.”
Small Business Administration loans are another option. The SBA guarantees these loans and the funding comes from financial institutions across the country. There are a variety of SBA loan programs available, including those to refinance debt, buy commercial property and to use as working capital.
Erik Taylor, owner of Chlorine King Pool Service in Seminole, Florida, says the type of funding comes down to how the pool business is structured. “When I worked on my business plan, I thought I would start and end at pool cleaning,” Taylor explains. “I never looked into building or renovating pools, so for the most part, my costs were going to be relatively low. I started my business the old-fashioned way: By saving up for it. If that avenue didn’t work, I would have probably done it through an SBA loan of some sort because they tend to be friendlier than banks.”
Those who need money to purchase equipment often look to leasing. With the equipment serving as collateral for the loan, the approval process can be less involved than for a traditional loan.
When other types of financing aren’t an option, invoice factoring can provide an alternative. This process involves borrowing against the company’s invoices. Often, the lender will loan up to 80% of the invoice amount once the customer has received the purchased product or entered into contract for a service. That said, interest rates can be high for invoice factoring, but it’s a way to get money quickly when other loan processes aren’t available.
No matter the type of financing, have some paperwork in order before approaching a lender. Frank Disher, owner of Alpha Pools in North Richland Hills, Texas, says this includes profit and loss statements, bank statements, cash flow statements, detailed list of assets, and personal and business tax returns. “A professional and detailed explanation of what the money will be used for can help a lot,” Disher says, “especially if you can demonstrate how it will give you a return on investment.”
It’s important to become informed ahead of the process. “You need to determine how you want to use financing,” Gill says. “Long-term growth and expansion strategies versus cash flow needed for operations or to manage cycles are very different. Strategic plans are needed before you move forward with borrowing funds.”