Wednesday, April 15, 2015
Green Means Go
Interest rates remain close to their historical lows but financing for many snow removal contractors and businesses continues to be elusive. One problem: lower interest rates have translated into lenders and investors being more selective. How then, can snow removal business owners hope to fund the expansion of their operations?
Any quest for expansion funding, must begin with an understanding of the various types of financing, where that funding can be found, and at what cost? What type of funding can best help your expansion dreams become a reality? Generally, there are two basic ways to fund expansion: debt financing or equity financing.
With debt financing, capital is received in the form of a loan which must be paid back. With equity financing, capital is received in exchange for part ownership in the snow removal business.
1. Equity financing
Equity financing can come from a variety of sources, including the snow removal operation itself, the owner’s pockets, as well as from private investors. Remember, however, keeping control of the snow removal business is more difficult when outside investors are involved.
Equity financing for growth or expansion is more straightforward than debt financing as the investor or investors need only be persuaded that the expansion will increase the value of their share of the operation above the price the investor is purchasing his or her equity today.
Getting expansion funding from venture capital firms is a long shot for most snow removal businesses. There are a number of other sources, however, including so-called “angel” investors, that can be tapped for equity financing.
Originally, a term used to describe investors in Broadway shows, “angel” now refers to anyone who invests his or her money in an entrepreneurial company (unlike institutional venture capitalists who invest other people’s money). Angel investing has soared in recent years as a growing number of individuals seek better returns on their money than they can get from traditional investment vehicles. And, contrary to popular belief, most angels are not millionaires.
Often classed as angels, are those who provide services to the snow removal operation, such as lawyers, insurance agents, or accountants. Angels may also be business associates or those that the business or its owner, are in regular contact with, such as: suppliers/vendors, customers, employees and even the competition.
3. The ESOP option is no fable
Selling stock in a snow removal operation does not have to involve strangers. Selling company stock to the operation’s employees through an “Employee Stock Ownership Plan” or ESOP is an often overlooked and usually misunderstood option.
With an ESOP, the incorporated snow removal business issues new shares of stock and sells them to an ESOP. The ESOP then borrows funds to buy the stock. The snow removal business can use the proceeds from the stock sale to its own benefit – say growth or expansion.
The company repays the loan by making tax-deductible contributions to the ESOP. The interest and principal on ESOP loans are tax-deductible which can reduce the number of pre-tax dollars needed to repay the principal. Remember however, the tax shield does not help with S corporations as they don’t pay corporate income taxes. Capital gains deferral, however, can make ESOPs attractive to these pass-through business entities.
A surprising number of businesses today have funds available after paying all of their bills – including taxes. One use for those unused profits is to distribute earnings to shareholders in the form of cash dividends. Seldom, however, are all earnings paid out as dividends. Usually a portion is kept to finance future growth.
Unfortunately, and far more often, retained earnings are largely wishful thinking. In fact, expanding with internally generated funds can be a very difficult process to plan for and implement. The main consideration, obviously, is whether the business has sufficient internal cash flows to pay for expansion outlays.
Growth often requires additional working capital to finance accounts receivable that all-too-often grow faster than payables, putting the snow removal business in a tight cash position. If this growth follows historic patterns, and is built on business relationships roughly similar (at least as to creditworthiness) as the operation’s current base, an existing, revolving line of credit can generally be expanded to accommodate the new credit needs of the business.
5. Loans to fund your dream
Raising expansion funds by borrowing allows the business to benefit from the principal of leverage – a technique of increasing the ratio on investment through the use of borrowed funds. As long as earnings exceed interest payments on borrowed funds, the application of leverage allows the snow removal business to increase the rate of return on stockholders investments. But leverage also works in reverse.
6. Borrowing for expansion
In addition to those loans that a business often receives from its owner, there are a variety of other types of funding available from a number of lending sources. A bank is probably the best-known source of funds for most snow removal businesses – even in today’s uncertain economy.
Typically, banks are the place to go for short-term lending, usually secured by tangible assets. In other situations, however, banks often help in either of two basic ways.
First, commercial banks can help a business increase production or output by providing funds to secure new equipment, machinery, vehicles and other instruments and devices.
The second area where banks can help is with working capital lines of credit needed to expand the new volume of cash flow.
7. Uncle's helping hand
Often thought of as a lender of last resort, the U.S. government is actually an excellent source for a wide variety of economical financing. After all, the federal government has a vested interest in encouraging the growth of small businesses. As a result, some loans, particularly those of the Small Business Administration have less stringent requirements for owner’s equity and collateral. In addition, many SBA loans are for smaller sums than most banks are willing to lend.
8. Funding locally
One of the best sources of assistance – and in many cases funding for expanding snow removal operations – are the many state, regional and local economic development agencies. There are nearly 12,000 economic development groups in the U.S. The purpose of these groups is to provide economic growth and development in the areas they serve. They generally encourage new or expanding businesses to locate in their area – or to remain in the area.
Even those who are aware of public funding often have misconceptions about who will and will not qualify. Many of these programs are looking for businesses with proven track records. The state, regional and local agencies are willing to help them expand their sales, which in turn will help expand the tax base as well as increase employment.
While not always a source of expansion financing, a state’s office or agency of economic development can be a guide to regional and local funding.
Obviously, financing the growth of a snow removal business is a complex affair. Funding to help grow and expand the snow removal operation is, however, widely available to those contractors and business owners willing to do their homework. Comparison shopping for lenders, rates and terms is strongly recommended.
Mark E. Battersby is an Ardmore, Pa.-based financial writer and frequent Snow Magazine contributor.