There is the old adage, “you have to spend money to make money.” To some, this may not appear as the obvious but over time the truth in this uncovers itself.
Spending money on rebuilding your brand equity, advertising campaigns, buying or leasing new equipment, or hiring new employees to run service calls takes a substantial initial investment. Leads don’t magically arrive at your front door, and jobs don’t finish themselves. You have to tap into your bank account with confidence and extract those funds to explode your contracting business.
A business may have the cash reserves from years of persisting and investing sweat equity, saving to fund their dreams. Ordinarily, the growth of a business has been rapid, and the cash reserves may not yet be established to deal with seasonality and make additional investments in potential growth hotspots within the business. At this point, it is a normal business decision to consider borrowing money to facilitate the growth of their business.
Taking on a loan allows the contractor extensive opportunities to move the needle that would otherwise take a significant amount of time to save up, allowing for continued scalability in the business with no interruption to growing profitability.
In the alternative lending space, not all loans are created equal and there are details you must be aware of upfront. An issue that business owners give a lot of kickback on is the rate and/or payback term. There are many short-term working capital lenders in the marketplace who will provide loans well into the six figures and they entice customers with the promise of quick approval and quick funding in as little as a few days. These loans have short repayment periods, oftentimes requiring repayment in 4-12 months with rates ranging from 20–50% and they draw payments from your account on a daily/weekly basis. This can create serious short-term cash flow issues for the business during the repayment period if they don’t have a clear path to deploying capital for the best ROI.
Commonly, the reason an owner takes out these short-term working capital loans is due to limited knowledge of the marketplace and the financing options available to them. Finding a trusted advisor that will help you navigate you and your business through the “lending jungle” is crucial to your success. Understanding the products available and planning accordingly will set the business up for sustainable long term growth through several key products. The right advisor/lender will understand what’s available to you based on several factors including but not limited to creditworthiness, time in business, industry experience, monthly deposits and ending balances, use of funds, collateral (if any), and industry type.
An SBA loan is one of the best financing products that businesses can use to receive working capital over long payback terms at the most favorable rates. An SBA 7(a) loan is a government-guaranteed loan product administered by the United States Small Business Administration and enables banks the opportunity to provide cash-flow based financing to businesses.
An example would be the owner of a home service company seeking $150,000 in working capital to add additional backroom staff and increase enterprise value. The two borrowing options available are the short-term working capital loan and an SBA loan…
Loan Type: Short-Term Working Capital Loan
Loan Amount: $150,000
Loan Term: 1 Year (Weekly payment)
Interest Rate: 20%
Monthly Payment: $15,037.55
Loan Type: SBA 7(a) Working Capital Term Loan
Loan Amount: $150,000
Loan Term: 7 Years (Monthly Payment)
Interest Rate: 8.25%
Monthly Payment $2,377.67
A short-term working capital loan provides the business with immediate cash typically within 24–48 hours after underwriting approval is issued, whereas an SBA loan requires a more thorough approval and closing process that can take 45–60 days. Although the process takes longer, the monthly cash flow savings when receiving an SBA loan are significantly higher. For the same loan amount, a business owner can save 84% of what their monthly payment would be by borrowing using an SBA 7(a) loan product versus a short-term working capital loan.
A lot of contractors start out with a short term working capital injection, go into credit repair, then receive an SBA 7(a) term loan for working capital needs. In the example above, they receive a loan for the same amount but pay almost $13,000 less per month.
If you already have a short-term working capital loan(s), you can use an SBA 7(a) loan to refinance the high-interest rate for a longer-term, lower interest rate with a lower monthly payment.
No matter what path your contract business is currently on, there is a wide array of capital solutions available for you to act now on.
Visit www.starcadecapital.com and contact us to learn about how a capital injection can turbocharge your business and set you up for long term success.