Feature, V2I6

Financing Options to Keep Your Business Running Smoothly

Of the many shed builders and dealers polled for this article about how they financed new investments, most shared the same answer: self-finance.

It doesn’t seem to matter whether that investment is new machinery or the transportation equipment that can make the job easier. These established builders, large and small, reinvested the year’s earnings back into their businesses to continue their upward growth.

Typical of the responses these builders offered was this explanation on financing from Steve Carleton, senior vice president of Reeds Ferry Small Buildings Inc. in Hudson,
New Hampshire.

“We buy a lot of new equipment every year, and we pretty much do it out of the year’s earnings,” Carleton says. “We don’t do a lot of financing, other than our property. But if we get new trucks, for example, we pay cash for that because we’re doing well.”

Self-finance is a smart way to go when things are going well. But what happens if a shed builder stops “doing well”?

A sudden drop in business due to the economy or a business or personal disaster can prove disastrous for revenue and future growth. What options do shed builders have when cash flow gets low? What options do they have if they need help to keep the doors open?

Getting Off the Ground

While self-financing large investments and avoiding long-term debt is commendable, this reliance can lead to its own challenges.

According to the U.S. Small Business Administration (SBA), about half of all new establishments survive five years or more and about one-third survives 10 years or more. To put that more pessimistically, that means 50 percent of new small businesses fail within the first five years of business. In many cases, failure comes because the business can’t weather the (literal or figurative) storms.

One challenge is that new business owners often underestimate how much capital they will need to have available to truly grow in the first few years. After all, a shed builder can only fund new investments with revenue if money is coming in from sales—and is properly managed.

So does that mean shed builders should be leaning on loans and building on debt?

Not at all. But it does mean that savvy business owners understand their cash flw and are educated on fiancing options as a strategy for smart growth.

Exploring Your Loan Options

Financing is likely to be necessary for builders moving beyond their own backyard workshop to a professional manufacturing facility.

“We bought a new piece of property across the street, so we’re up to about eight acres of property that we have,” Carleton shares. “We use the property across the street for truck, fleet repair, and extra storage for various display sheds. So we obviously finance that.”

The same proved true for Star-tec Builders in Temple, Texas.

“We’ve had to work some of those financing details out in order to do some expansions,” says Mark Miller, office manager for Star-tec Builders. For Miller, financing an expansion meant getting an education in banking.

“One thing we found out is there’s a lot of banks don’t understand the business,” Miller says. “Most banks don’t understand the business, and they look at it as a risky investment.”

For Star-tec, the key was to work with a small bank familiar with the industry. The Texas-based company works with a bank in Tennessee that has financed similar operations.

“We’re working with banks that do understand,” Miller says. “[Our bank] is in the industry, they know what it’s like, they’ve done it for years, so they’re a bit more apt to provide finance for this kind of a business.”

Not many banks advertise on their website, “Friendly to shed builders.” So when you approach your financial institution for a loan, it pays to have on-hand a thorough business plan and supporting documents.

According to SBA, those supporting documents should include projected financial statements, cash flow and a balance sheet; an accurate personal and, if already in business, business credit report; at least three years of income tax returns; financial statements; bank statements; a collateral document; and business documents to include articles of incorporation, business licenses, etc.

In his white paper “Small Businesses: Weathering the Economic Storm,” Stephen King, president and CEO of accounting service provider GrowthForce LLC, advises that small business owners remember their Cs. The five Cs are the classic considerations on which bankers focus before approving a loan. According to King, these are:

1. Character: This takes into account the borrower’s credit report and payment history.

2. Cash flow: No matter what stage of business your loan is for, you must be able to prove your business has enough cash flow to repay the loan while meeting other
business expenses.

3. Collateral: These are the business assets you’ll offer the lender in order to secure a loan in the event it is not repaid.

4. Capitalization: This might include such business resources as fixed assets, retained earnings, and the owner’s equity.

5. Conditions: This reflects external factors including your competition and driving industry trends.

Alternative Financing

The U.S. Small Business Administration notes that bank loans going to small businesses totaled nearly $600 billion in 2015. But that’s not the only solution for gaining access to capital. According to SBA, small businesses are typically financed through owner savings; loans from family, friends, and commercial lenders; bonds; stocks; ownership stakes; and other arrangements.

Admittedly, there’s little evidence that venture capitalists are looking to invade the portable building space. And few shed builders seem to be turning to the crowdfunding platforms such as GoFundMe.com and Kickstarter (in fact, the one shed-related project, an ultra-portable modular shed, is still a far cry from full funding).

But there are ways that shed builders and dealers can get creative.

“We got started more with private investors over bank financing,” Miller shares. “We’ve actually done some lending through our rent-to-own company.”

As Miller explains it, “They provide us funding and in return they get a rent-to-own contract.”

Financing After an Emergency

For small businesses that maintain there’s no need to have access to financing when profits are adequate to cover investments, there is still one area where no amount of planning can cover you.

Consider this: when Hurricane Matthew swept up the Southeastern United States in October, it dragged along the East Coast winds as high as 107 miles per hour and led to
significant flooding. If the hurricane could damage the roof at NASA’s Cape Canaveral facility, just imagine what it could do to a display lot full of sheds.

If your entire display lot was gone in an afternoon, would you have the resources available to rebuild? If your workshop was damaged in a disaster, would you have the resources to meet the demand from homeowners likewise looking to rebuild?

There are resources available to help small businesses recover after a disaster, and these range from insurance to disaster loans available through SBA. But few of these options provide immediate relief. Businesses that have previously gained approval for a revolving line of credit, however, are able to immediately get back to work following a disaster.

With a line of credit, unlike a business loan, small businesses owners are only charged interest on what they use. There’s typically no charge to have it—unlike most credit cards—but in the event of an emergency it can be immediately available to help fund day to day expenses.

Planning for Tomorrow

The bottom line is that small businesses determined to grow may find, like it or not, that they need access to borrowed capital. To make the smartest decision at a time of need, it can pay to do your research, put in place the right relationships, and know which resources you can put to use today.

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