By Mark E. Battersby / Published March 2022
Setbacks in a slowly improving economy combined with the disappearance of many pandemic-related government funding options have left many pressure cleaning operations struggling to survive economically and financially. Making things even worse, today small businesses continue having a hard time borrowing money.
After all, shutdowns and the poor showing of so many businesses that remained open during the COVID-19 economic slowdown prompted banks and other lenders to deny loan requests—continuing even now. All of which leaves the question, how can an owner fund a cash-strapped pressure washing business?
Good times or bad, the hardest question for any contractor or business owner to answer is, what kind of capital should he or she seek? Few contractors or business owners are aware of all the options available, and they don’t have time to explore the many possibilities.
Obviously, every business owner should have at least some personal funds at risk to show lenders and potential investors that the owner is committed to the success of the business. Unfortunately, our tax laws make self-funding a touchy—and complex—strategy.
Using personal or family funds to finance a business is called “boot strapping.” Boot strapping can involve personal investment by the founders, their family, and friends.
However, whenever a loan is made between related entities, or when a shareholder makes a loan to his or her incorporated pressure washing business, our tax laws require a fair-market interest rate be included. If not, the IRS will step in and make adjustments to the below-market (interest) rate transaction in order to properly reflect “imputed” interest. How large the tax impact depends on the effect of added interest income to the lender and the bite of an offsetting interest expense deduction felt by the borrower.
Obviously, conventional financing has not completely disappeared; it has just become more difficult to obtain. Much of today’s small business funding requires the “personal” touch, including such things
as the following:
In the absence of many pandemic-related government funding programs, borrowing, even with a personal guarantee, is not the only option. Following are other fund-raising options:
And, don’t forget the return of standby funding options such as these:
Thanks to changes by both the IRS and the Securities and Exchange Commission (SEC), crowdfunding is helping many small businesses. Crowdfunding that relies on investors can help get an idea, project, or business off the ground, often rewarding investors with perks and/or equity in exchange for cash.
With equity crowdfunding, where investors are given a stake in the pressure cleaning business, there are strict SEC regulations both the business and investors must follow. Somewhat less regulated, so-called funding “platforms” are an increasingly popular door to internet financing.
With the government programs exhausted or gone completely and traditional banks continuing to limit access to capital, online lenders have become popular—especially for small businesses and their owners struggling with bad credit.
With an online or alternative lender, bad credit is not always a barrier to getting the needed financing. However, while these lenders put up fewer barriers, the drawbacks include significantly higher interest rates, risk, and lower loan amounts.
An often-overlooked internet option is so-called peer-to-peer (P2P) business lenders. These lenders eliminate the middleman, such as banks, to connect borrowers with individuals and institutional investors. Unfortunately, the cost of borrowing with peer-to-peer financing is usually higher.
Still, alternative lenders are an option when the bank says no. Online lenders also offer fast cash with a number of online lenders able to process funding within 24 hours. Financial technology, or FinTech, interacts with a major bank minus the human element or is offered by independent companies working outside traditional banks.
Alternative funding options may be a good fit in many situations. Strong, positive cash flow generally matters far more to alternative lenders, easing the path to secured funds with less friction.
Unfortunately, growing any pressure cleaning operation with any type of funding can be a very difficult and expensive process. The main consideration, obviously, is whether the business has sufficient cash flows to pay for growth or expansion outlays.
Cash flow is the lifeblood of every business. Having too little cashflow hampers the pressure cleaning operation’s ability to pay employees or suppliers—or repay lenders—on time, while having too much indicates the business should be making an investment in much needed renovation or new equipment. Analyzing the operation’s cash flow aids in knowing the amount of money available in a given period of time.
In order to analyze cashflow, a statement tracking the amount of cash the business has coming in and how much is going out is necessary. It is essential to monitor how cash flow increases as sales increase since it’s important that they move at a similar rate over time.
A surprising number of small businesses today have funds available after paying all of their bills including taxes. Seldom, however, are all earnings paid out as dividends. Usually a portion is kept to finance future growth.
Also, as already mentioned, there are equity sales. An equity sale refers to the sale of the common shares of a business instead of only the assets. Of course, selling an interest in the pressure cleaning business involves giving up control to an interested party willing to invest in the operation.
Things go a lot easier when potential lenders, investors, suppliers, and partners can decide to take a risk based on the pressure washing operation’s credit history and its capability to repay those obligations. With strong business credit, a business can usually borrow at a lower cost with more favorable terms. In fact, many small businesses with good business credit have discovered it is possible to get loans without a personal guarantee even today.
Obviously, a business owner seeking to borrow faces many challenges. Will the money be available and, if so, at what cost? What will be the actual cost, including fees? Is the loan good for an extended period of time or can payment be demanded early?
The owners, partners, and share-holders of every pressure cleaning business admittedly have options, but their first stop should be their local bank. If practical, comparison shopping for lenders, rates, and terms is strongly recommended as is seeking help from the pressure washing operation’s tax and accounting professionals.