Business Loans Secured With Careful Planning

Wading through the myriad of decisions that comes with raising capital through financing can be a daunting task for building service contractors.

But experienced business owners say the key to borrowing money is to take a conservative approach that is based on careful planning and having a keen pulse on the future of the business.

Do Some Homework

Creating a business plan is a challenge for many BSCs since it takes a certain amount of honest, look-in-the-mirror analysis of the business and its potential growth.

“A lot of [BSCs] just say that they want to make a lot of money, but they have to slow down and say, ‘Wait a minute, what’s the program growth?’” says Dick Ollek, owner of Consultants in Cleaning, Camdenton, Mo., which advises small and mid-sized cleaning companies.

He also recommends going into a financing with the ability to articulate exactly how the money will be paid back.

“What I like to call ‘emerging contractors’ are those that want to grow and they will take anything, wanting to add business,” says Ollek. “Then, all of a sudden, they look around and they have added lots of business and lots of volume and they are broke because they don’t understand the ramifications to adding payroll and buying machinery.”

A BSC who is considering financing should look at the reasons why they are in a bind and need the money, says Jeff Oddo, president of City Wide Maintenance, Lenexa, Kan.

BSCs have a habit of underbidding jobs to ensure that they earn the business, Oddo adds. While this may build a BSC’s client portfolio, it may be considerably detrimental to its cash flow.

“There is very little reason (for financing) if a building is bid right, then a BSC has the cash flow to buy the vacuum cleaners and scrubbers,” Oddo says. “All business is not created equal and all business is not good business. In reality all it does is creates a weight around your neck and it ends up burying you if you allow it.”

BSCs that have been in the business for a while have different needs than a newer start-up just beginning to build a client base, Oddo says. He also makes a distinction between debt financing and equity financing that is based on the value of current assets.

“If you have to do debt financing, there great programs to roll over your 401Ks for those people with 401Ks,” says Oddo, who also recommends qualifying BSCs research Small Business Administration programs for minority businesses owners.

After a BSC establishes a business plan and examines other financing options through the government, they should be prepared to compile a portfolio that details historic information regarding the business finances.

“To do any loan work we have always needed to produce a yearly personal financial statement on the bank’s form, two to three years of personal tax returns and two to three years of business financials as well as tax returns,” says Don Pottieger Sr., president of Southland Landscape Corp., a landscape management company in Charleston, S.C. Pottieger is former owner and founder of FMI Services Group, Inc., a cleaning contract company also based in Charleston.

Another decision a BSC needs to make before attempting to secure a loan is the reason they would like to borrow money. Only borrow money for income-producing assets such as vehicles, equipment and entire businesses and not to finance consumables such as inventory, computers and small tools, Pottieger says.

“There should be a direct correlation for the financing to not exceed the length of the contract,” he says. “Obviously financing depends on your individual situation in regards to cash on hand, market conditions and your business plan.”

BSCs must then decide how much to borrow. BSCs should only borrow an amount they are comfortable with while keeping in mind that the bank will require them to comply with certain operating ratios, Pottieger says. These include debt service coverage ratios as well as maximum debt to tangible net worth ratios that borrowers must be able to support to stay in the bank’s good graces.

“If you cannot meet these ratios the bank will probably not feel comfortable with your performance moving forward,” Pottieger says.

Find the Right Lender As a BSC is developing a financial portfolio, they must also establish a relationship with a banker. BSCs are better served if they do this before they need financing.

“You don’t want to borrow money from a banker that has never met you before,” Ollek says. “What incentive does he or she have?”

Before building service contractors head to the bank for financing, they need to format and outline realistic goals for their business, he adds.

“They really have to format how they grow,” Ollek says. “When I went into the business, I put together what I thought was a reasonable business plan. It was not a formal business plan by any stretch of the imagination.”

The plan was what Ollek thought he would need in terms of the amount of business his enterprise would require to be sustainable. He shopped the plan around to area banks, finally settling with a small institution that wanted to compete for business with larger banks in his area.

“What I needed was operating capital, so what I am suggesting is finding a small town bank that is aggressive,” says Ollek, who eventually borrowed $50,000 from the bank. “What BSCs have to do is find a bank that understands the service sector. The banker has to understand that we are in a business that really doesn’t have anything to repossess.” He also suggests borrowing a small amount that a BSC might not necessarily need and pay it back well before the loan matures so that they have a strong track record and an established relationship with a bank.

BSCs should make sure that their banker and accountant are compatible, since they will work closely together.

It is recommended that the BSC treat their banker much like they treat a client. Show them plans for the following year and explain to the banker what financing might be needed for those plans to materialize. Also, meet with the banker on a regular basis, even occasionally buying them lunch to fortify the relationship when it is needed.

“You want to have the banker so informed and so confident in your ability to perform that he or she might lend you money when you probably won’t loan you money,” Ollek says.

BSCs should also get in the habit of keeping the banker abreast of the enterprise’s financial health by presenting them with quarterly financial statements on a volunteer basis. This allows the banker to become an advocate for the business if financial trouble arises or if the BSC needs to finance more money.

“The one thing that you don’t want to do with your banker is surprise them,” Ollek says. “You want to keep them in the loop.”

Brendan O’Brien is a freelance writer based in Greenfield, Wis.