The old saying that “you need money to make money” has never been truer. With many of the government programs that helped so many snow removal businesses survive the pandemic exhausting their funding – or about to – where is today’s financing going to come from?
Without the special programs, loans and grants created specifically to help survive the pandemic, now infusions of capital are necessary to regain pre-pandemic profits and to grow the operation. Once again, the old funding criteria, cash flow, credit and collateral kick-in, as with so many businesses, continue to struggle with the pandemic’s impact.
THE THREE THREES
A positive cash flow indicates the snow and ice management contractor’s ability to make regular loan payments. Every potential lender will look at future earning predictions before interest, taxes, depreciation, and amortization to determine whether cash flow warrants the financing sought.
Timely debt repayments are another factor lenders view. That means looking at how the borrower is using any existing loans and whether the operation remains in good standing with those earlier lenders. All are key indicators to lenders of the operation’s ability to handle additional debt.
And then, there is collateral, the one asset lenders can consider taking possession of and selling if the borrower defaults on its debt. For many businesses, property such as vehicles, equipment, real estate, accounts receivable and inventory are considered collateral.
Unless the operation’s owners, family members or key employees have deep pockets the three “Cs” can help finding the right potential lender. For most businesses lending options generally begin with local, regional, or national banks.
For every snow and ice removal business with a good track record before and hopefully through the recent economic downturn, traditional bank loans or SBA guaranteed loans may be the best option. Despite a reluctance to finance small businesses, traditional banks are a great starting place when seeking funding.
Lower interest rates, fees and better terms may offset the personal guarantees and risks often associated with bank and SBA funding. Even without a strong track record or sufficient collateral to qualify for a bank loan, a discussion of the operation’s financing needs can steer the snow removal business owner/operator to other options.Locally owned banks are another resource for small business financing because of their strong interest in economic development within the community. There are about 5,000 community banks in the U.S. and, prior to the pandemic, according to the FDIC, locally owned community banks held 36 percent of small business loans.
LINES OF CREDIT
A line of credit means that a bank or other financial institution sets aside funds up to a certain credit limit that the business can borrow against as needed. All lines of credit consist of a set amount of money that can be borrowed, paid back and borrowed again.
Interest is paid only when funds are “drawn” from the line of credit with the rate of interest, size of payments and other terms set by the lender. A line of credit can be secured (by collateral) or unsecured, with unsecured lines of credit typically subject to higher interest rates. Once the borrowed funds are paid back, the amount is again available for the operation to borrow.
A line of credit has built-in flexibility. The business takes out only the money needed immediately and only pays interest on the amount “drawn down” until repaid. All-too-often, however, longer-term funding is necessary, and for that, there are other funding options.
For a snow removal or ice management business that wants or needs to borrow outside the traditional bank or SBA system, there are hundreds of specialist small business lenders that can help, although requirements, terms and interest rates will vary widely.
Like banks, credit unions offer favorable rates and loans backed by the SBA. However, unlike banks, credit unions have increased their small business funding. In fact, the number of credit unions offering small business financing has doubled according to the CFPB (Consumer Finance Protection Bureau).
With credit unions membership is usually required. Fortunately, the co-op nature of credit unions often ties them to the community and means reaping the benefits of more personal relationships.
Equipment financing is ideal for any snow or ice removal business needing hard assets quickly, but can’t afford to purchase them outright. Equipment financing is available from banks and with SBA guarantees. There are also lenders, including dealers and distributors, offering targeted financing programs.
Invoice factoring and accounts receivable financing are similar borrowing concepts for short-term loans collateralized against money owed to the business. The interest rates on these advances are usually higher than an ordinary loan, and there are often other fees. Fortunately, in addition to traditional bank programs, there are factors and other specialty lenders all too willing to provide financing.
Thanks to changes by both the IRS and the Securities and Exchange Commission (SEC), Crowdfunding is helping many small businesses. Crowdfunding that relies on investors can help get an idea, project or business off the ground, often rewarding investors with perks and/or equity in exchange for cash.
Although the popularity of Crowdfunding has increased, there are caveats. The proposal or business must, for example, be intriguing enough to attract multiple investors. With equity Crowdfunding, where investors are given a stake in the business, there are strict SEC regulations both the business and investors must follow.
Somewhat less regulated, so-called funding “platforms” are an increasingly popular door to Internet financing. With the government programs exhausted or gone completely and traditional banks continuing to limit access to capital, online lenders have become popular – especially for businesses – and their owners – struggling with bad credit.
With an online or alternative lender, bad credit is not always a barrier to getting the needed financing. However, while these lenders put up fewer barriers, the drawbacks include significantly higher interest rates, risk, and lower loan amounts.
An often-overlooked Internet option are peer-to-peer business lenders. These lenders eliminate the middleman – such as banks – to connect borrowers with individuals and institutional investors. Unfortunately, the cost of borrowing with peer-to-peer financing is much higher.
Still, alternative lenders are an option when the bank says no. Online lenders also offer fast cash with several online lenders able to process funding within 24 hours. Financial technology, or FinTech, interacts with a major bank minus the human element or is offered by independent companies working outside traditional banks.
Deciding on the best option for many snow and ice management business owners/operators begins, as mentioned, with the bank used for most business banking. Even without a personal relationship with a banker, the bank may have a wider perspective of the operation’s debt, spending and cash flow situation.
While the snow operation may just be a number in the system of a traditional bank, it is in the system and that is a stronger argument for getting a loan approved. If the operation’s current bank isn’t receptive, a new bank, perhaps a community bank, might be in order.
Community banks are more likely to consider all factors in addition to the usual cash flow, credit, and collateral factors. However, if traditional or community banking, even with a potential SBA guarantee, isn’t possible, alternative banking may be the answer.
Alternative funding options may be a good fit in many situations. Strong, positive cash flow generally matters far more to alternative lenders, easing the path to secured funds with less friction.
Today, nearly every snow business can secure a loan. Obviously, the borrower faces many challenges. Will the money be available and, if so, at what cost? What will be the actual cost, including fees? Is the loan good for an extended period of time or can payment be demanded early?
Finally, if uncertain what the business might look like under the microscope of cash flow, credit and collateral, the operation’s CPA or financial advisor can help draw up a profile similar to that required by potential lenders. They might also help steer the snow removal and ice management contractor or business owner to potential funding sources.