Capital is the life blood of any business operation. Without it, companies cease to exist. But how do professional snow removal contractors obtain capital? And what are the common mistakes many small business owners make when raising capital?
There has been a significant tightening at the banking level as a result of this recent economic contraction. Whatever lending is going on today seems to be focused on larger firms, but in reality the lending problems are affecting all businesses.
When a snow contractor needs to invest in his business, hire qualified staff, make capital expenditures, or move to larger quarters; where does he turn to receive the funds he needs to fuel his company’s growth? This is an important issue because many believe success in the small business sector is paramount to a successful and swift economic turnaround.
Therefore, snow removal contractors need to be creative and seek every available source of financing to keep their businesses flush with cash during difficult times.
Here are some of the options snow contractors should consider:
1. Friends and family
2. Existing equity holders
3. Non-traditional sources of financing
Factoring. You may be able to find lenders who will advance funds based on specific invoices. These lenders will try to understand your business and then figure out a way to give you up-front cash on a newly generated invoice. They will generally advance you about 75 percent to 80 percent of the invoice amount and charge you anywhere from 1.5 percent to 3.0 percent per month in fees until it is collected. It generally has to be paid within 90 days.
Asset based lending. Some banks will lend you monies based on the company’s assets. Whether it is equipment, real estate, inventory, accounts receivable or vehicles, banks will lend using the company assets as collateral. The advance rates will vary usually based on liquidity of the assets (accounts receivable and inventory being more liquid and therefore would have a greater advance rate), and the cost to this type of financing can be costly as well as the reporting requirements being somewhat cumbersome.
4. Using personal assets as collateral
5. Credit cards
It is important for professional snow removal contractors to speak to their financial advisors to make sure whatever financing options they choose to pursue is the correct one for their unique situations.
When raising capital avoid these common mistakes:
1. Undercapitalizing the business
The inability to obtain capital from the beginning could spell disaster. It is important to sit with a business accountant with the requisite experience to assist you in accurately projecting the amount of funds required for your snow removal business.
2. Understanding the true value of your business today.
The value of your company will be an inevitable question when speaking with a potential investor. Therefore, it is important to present an accurate valuation. If it is too low, you will be giving up more equity than you need to. If it is too high, you will lose his interest.
3. Borrowing from family and friends – keep it arms length.
Professionals will say this is a mistake and it very well could be; but if it is kept business like from the outset with proper documentation, it could be a very helpful option. The important note here is that it is established and maintained as an arms length transaction.
4. Failing to keep good records
Not devoting a serious methodology to keep all business records in order is ill-advised and could be costly.
Creativity and resourcefulness are paramount during times of economic hardship.
It is vital that you use all available sources to keep your business flush with cash while the government attempts to create programs designed to ease the lending environment and improve our economy’s conditions.
Chris E. Talis, Hedgerow Mergers & Acquisitions founder and senior partner, holds an MBA in finance and taxation, and is a New Jersey licensed Certified Public Accountant. For more information, contact him through his Web site: www.hedgerowma.com
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