How to Get More Money to Run & Grow Your Business
According to the U.S. Small Business Administration (SBA), most businesses that fail do so for lack of money management, not as you might expect from lack of sales, or profits. This is particularly true in the portable sanitation business, because the cost to service increases quickly during the busy months and payment for service can trail a month or two behind delivery of service. Peak earnings come in summer, peak receivables come in early fall, and peak cash expenditures come nine months later.
Having enough money to manage cash flow on a day-to-day basis and making projections for the months and years ahead is a tricky job. If your cash reserves don’t last or your line of credit isn’t large enough, you won’t be able to purchase the supplies you need to make your busy season a success. You have to be able to generate the cash to cover the overhead as well as any new debt service payments.
Even if you make the sale, you could fail if you don’t charge enough to keep the business healthy for the entire twelve-month business cycle. Along with underbidding jobs, another common mistake for start-ups is to pick the “low-hanging fruit” when you sign up new customers. These are customers who need service because they have been dropped by a competitor such as contractors who can’t get service because they have had trouble in the past paying their bills. You make the sale, perform the service, but can’t collect payment on time. This stresses your cash flow position and could lead to problems paying your debt, making payroll, or buying supplies such as fuel or consumables that allow you to continue servicing. Sound pricing strategies are fundamental, so is becoming aware of the credit history of new customers.
An annual budget is also vital to anticipating large recurring expenses such as taxes, equipment renewal, and seasonal employees. Developing a five-year spending plan for growth can show roughly how much needs to be saved each year depending on how much growth you plan to achieve.
Developing a Line of Credit
If you don’t have enough capital to run your business through a complete season, then you may be interested in finding financing from a bank that supplies small business loans. There are two important factors involved in getting a business loan:
1. a proven track record (normally 2 years) with a healthy cash flow, and
2. an excellent presentation of a sound business plan.
A lot of people use personal savings or borrow from relatives and start off small in order to develop a track record. However, someone who has a proven track record in another busi-ness and writes a sound and plausible business plan may be able to find start-up capital with a financial institution.
However, an individual or partnership with little experience is normally advised to seek help from the Small Business Administration because the SBA can guarantee up to 75 percent of the loan amount allowing banks to feel much more comfortable about providing a loan.
How much you can borrow depends greatly on the true cash equity your business has. Banks look at debt-to-worth ratio to define the net worth. If you are a sole proprietor, they also look at your own net worth including home value, cars, and other investments. But solid numbers alone won't win loan approval.
Presentation skills and your business plan are critical to a successful out-come. You need to present a business plan that includes a company background, purpose of the loan, product/ market information and financial information.
Include projections on how you intend to accomplish your goals in your business plan. Who the market is, how large it is, what service entails, how much service costs you, how much you can charge, and where the capital to finance a purchase or lease equipment and to operate will come from.
Your confidence in your plan, knowledge of your business and ability to answer bankers’ questions appropriately may mean the dif-ference between a large line of credit, or no credit at all.
Sometimes it is easier to get financing when purchasing an existing sani-tation business with a recent track record of success and current existing customers. The bank can look at how the business was run in the past and compare it to your business plan to make a determination on whether they are willing to bet on your success or not.
Whenever you create a business plan, be sure that your future projections are not overly “rosy.” A good contingency plan will help you anticipate problems and have enough capital left to deal with them. Something unexpected always hap-pens, and successful businesses have enough capital to deal with whatever lurks around the bend.
Lease or Buy?
Ben Franklin’s famous quote: “Neither borrower nor lender be,” may have been good advice 200 years ago; but today your decision should be based on accounting principles, and an understanding of cash flow, rather than the advice of others. The question of whether you should lease or buy all depends on how you plan to run your business.
If you don’t expect a lot of growth, or if you are concerned about a downturn in business, then buying makes more sense than leasing. The last thing a business owner wants during a downturn is to make payments on equipment that is not being used.
However, if you expect to grow, leasing may be a good alternative to buying. For example, if you use all your available cash to buy equipment and then find new customers, you have no way to buy additional equipment because your cash is already tied up. Leasing can be a way to keep more working capital on hand.
According to Mitch Davis of Preferred Lease, a company that specializes in leasing equipment to the portable sanitation industry, it takes approximately 20% of restroom units in service to make the monthly payments on leased equipment. “Look at this way,” he said, “If you lease 100 units and rent 60 (typical utilization for the industry), then 20 units are paying the lease on the entire 100, while the other 40 restrooms are bringing in cash that can be used for operating expenses and growth.”
Obviously there are financing expenses that come with leasing. In fact, financing charges can increase the cost of equipment by a third or more. However much of this extra cost can be written off on taxes. By tying up less of your available cash at any given time, leasing may be the best option to relieve cash flow pressure if you plan to grow your business.