By Gerri Detweiler
Financing your landscaping business to manage cash flow may be your number one source of entrepreneurial stress. If so, you’re not alone. According to the Federal Reserve, 64 percent of employer firms faced financial challenges in the prior 12 months, and the majority of them (69 percent) addressed these challenges by using the owner’s personal funds.
Lining up financing before you’re in a cash flow crunch can help you avoid tapping into personal savings or running up balances on your personal credit cards. Here are six ways to finance your landscaping business.
- Equipment loan
An equipment loan is a form of business financing you can use to acquire equipment or machinery your company needs. Your vehicles, stump grinders, trailers, blowers, and other specialized equipment are necessary purchases. Without them, your business would grind to a halt. But they come with hefty price tags.
Instead, you may be able to get equipment loans or leases directly from the manufacturer or through third-party leasing companies. While the equipment serves as collateral, no financing provider wants to have to repossess and liquidate that equipment. So they will likely look at credit scores (personal and/or business), time in business, and revenues when deciding whether to approve your application.
John Lynch, owner of Lynch Landscaping in Norridgewock, Maine, said equipment loans help his company grow faster, and allow him to keep more cash on hand for things he can’t finance, such as payroll.
Lynch said he either does business with equipment manufacturers like John Deere or their financing partner, who offers equipment loans at low rates. His company also gets equipment loans from a local bank for large equipment purchases.
- Business credit card
You can use a business credit card, or several, as a financing strategy. You may be able to finance large purchases inexpensively by using a card with a low introductory rate or a low-rate balance transfer.
A credit card with an interest rate of 16 to 18 percent is often cheaper than other small business financing options that frequently carry much higher rates.
Small business card issuers approve applications based on the applicant’s personal credit scores and income from all sources. Your personal credit scores should be in the mid-600s or above before you apply. A personal guarantee will be required.
Baldo Calvillo, owner of Grizzly Landscape in Lake Elsinore, Calif., frequently uses business credit cards for several reasons. Calvillo said credit cards help him preserve his cash flow for purchases that require cash.
He also uses credit cards to make it easier for his customers to pay for their landscaping projects. He can use business credit cards to purchase materials necessary for the project. That gives his clients more time to come up with the required funds.
It’s a smart strategy that allows Grizzly Landscape to help more clients than if all their clients had to pay the entire cost in advance.
- Term loan
A term loan gives you a set amount of time to pay back the funds you borrow. You’re probably familiar with consumer term loans in the form of auto loans or mortgages.
Banks and credit unions often make small business term loans, as do some online lenders. Term loans from traditional lenders can take some time to finalize, so make sure you apply well before you need the cash.
If you’re applying through a bank, understand they typically require extensive paperwork, such as:
- Personal and business income tax returns
- Personal and business bank statements
- Balance sheet
- Profit & loss statement
- Business plan
You’ll need an excellent credit score, healthy cash flow, large capitalization, and the bank may ask you for collateral. It may seem like banks only make loans to companies that don’t need the money. They are risk-averse. So it’s best not to apply if you don’t qualify. There are other funding options, and you can build your business credit so that a term loan is a viable future option.
Online lenders may be more flexible than banks. They often review term loan applications quickly. To make a fast decision on your application, they will likely require you to link your business bank account to evaluate your revenues. The lender may also review your personal and/or business credit scores as part of the decision.
- SBA loan
To clarify, the SBA does not make loans; they guarantee them. The SBA works with approved lenders who make these loans. The SBA then guarantees a percentage of the loan in the event the borrower defaults.
The SBA has a variety of loan programs, and an approved lender representative can help determine which one is right for your landscaping business. To qualify for an SBA loan often takes a fair amount of effort. The SBA sets minimum requirements, and lenders may have additional requirements.
Before you apply for an SBA loan, you’ll want to be ready to provide:
- Business financial data, including annual revenues and financial projections
- Copies of tax returns; up to three years of personal and business tax returns
- The amount you wish to borrow and how you’ll use those funds.
- A business plan. Not all lenders require one, but many do.
An SBA backed loan can take weeks, or up to several months, to fund. So if you need cash quick, you should consider another option.
- Merchant cash advance
If you have clients who pay by credit or debit card, you may be able to get a cash advance against future sales. With a merchant cash advance, the funding provider gets paid back by taking a portion of your future credit card sales each day. You can usually get approved in a day or two, with very little paperwork. But ‘you’ll pay for this convenience with high interest rates.
Because this option is so expensive, you should only use it if you’re desperate or want to take advantage of a short-term opportunity that requires fast cash. You don’t want to rely on a merchant cash advance since its higher cost can make it challenging to manage your future cash flow.
- Line of credit
An unsecured business line of credit — also known as a revolving line of credit or LOC — is essentially a credit card without the plastic card attached. With a small business line of credit, you can borrow up to the credit limit approved by the lender. Here’s how they work:
- You only pay interest when you borrow money (and only on the amount borrowed).
- There is no interest-free grace period as you get with most credit cards.
- You may be charged annual or monthly fees, even when you’re not borrowing money against your line of credit.
- You can have your LOC funds deposited directly into your bank account. It allows you to use the funds with creditors or vendors who ‘won’t accept a credit card.
Tip: allow one business day for the funds you draw from your LOC to show in your bank account.
There are many other ways to fund your venture. Take your time to shop around and find the one that will help your business thrive.
Gerri Detweiler has been guiding individuals through the confusing world of credit for 20-plus years. Her articles have been widely syndicated, and she is the author or coauthor of five books, including her most recent, Finance Your Own Business: Get on the Financing Fast Track. She is education director for Nav, which matches small business owners to their best financing options and gives them free access to their personal and business credit scores.