Financing is essential for operating a business. Lending has slowed along with the economy, but new data from the Thomson Reuters/PayNet Small Business Lending Index, which measures the overall volume of financing to U.S. small businesses, show borrowing is up among small businesses.
The index rose 15 percent in August over the previous year, 16 percent in September over the previous year, and is now at its highest level in nearly two years.
This report might encourage retailers to explore their funding and financing options, which can include cash, credit cards, or credit lines or loans, among others, and investigate the best fit for their business.
Using Cash to Run a Business
Mike Abssy has built and grown Schraders Speed & Style, the Azusa, California-based full-service restoration and maintenance shop he started in 2003, almost strictly on cash.
“It was all-cash so I only did what I could afford to do,” he said. “Same thing with equipment, I only bought equipment as I could afford to buy it [with] cash.”
At one time, Abssy’s shop had tripled in size. Last year, he decided to downsize and now operates his one-man business out of a 1,500-square-foot shop. He’s maintained his preference for using cash based on what he’s observed at other industry shops.
“I saw a lot of other shops, as they got bigger, they took on more and more debt to expand,” he said. “They’re really impressive shops to walk into, but I didn’t see how they could keep their doors open with the volume of work and with the overhead of paying back loans, so I just never went down that road.”
“I expanded at the pace that I could afford and that way when I decided to downsize, I didn’t have any obligations,” Abssy continued. “I didn’t have a big debt over my head that I was trying to pay off.”
Operating on a strictly cash basis requires planning, according to Abssy.
“There’s a lot of forecasting and a lot of trying to save cash,” he said. “You have to be conscious about getting your clients to pay their bills on time, making sure you don’t overextend yourself, even in the short term. You just need to make sure that you get paid for the jobs on a timely basis so that you can pay your bills.”
Abssy may be in the minority in using cash to run his business.
“If you’re in a position that you can do everything with cash, then you’re in a very substantial position and you have good cash flow and your business is probably not in a problem situation,” said Gene Fairbrother, president of Dallas-based MBA Consulting Inc., a management consulting firm. “There’s nothing wrong with doing business in cash, but very few businesses are able to do it that way.”
Abssy has found downsides in being cash-only.
“At the beginning, I had 1,500 square feet and one part-time employee and I had people banging down my door to build cars, and I couldn’t expand as quickly as I wanted to because I didn’t have the money to do it,” he said. “At that time, if I would have had the cash available, if I had borrowed money and I was able to expand quickly, maybe I could have captured some more money earlier.”
In spite of any downsides he may experience, operating this way gives Abssy flexibility, he said.
“It gives me a lot more freedom to operate the business the way that I want to, so if I want to take a job, I can take a job,” he said. “If I don’t want to take a job because maybe I have a bad feeling about a client or it’s just a job I don’t want to do for whatever reason, I don’t have to take the job because I don’t have to get every nickel that is out there to get. I can be more selective about the work I take [and] about the clients I become involved with.”
Using a Credit Card for Orders
Don Dixon has been using business and personal credit cards to buy the parts he needs to build engines for his customers at Don Dixon HiPerformance Engines, the one-man shop in Norcross, Georgia, that he’s owned since 1987.
“If I’m ordering a set of pistons, they’ll ask you if you want to put that on a card and they send it to you [via] UPS,” Dixon said. “You give them your card [number] and then you vow that you’re going to pay that sucker off as soon as some money starts coming in, and then you get to that day and the guys that were going to pick up their engine haven’t, and there you are.”
Dixon isn’t alone in using credit cards to finance his business.
“Using your credit card to finance your business is very common,” said Fairbrother of MBA Consulting Inc. “If you’re paying off your credit card every month, that’s fine, but if you’re using your credit card because you’ve got negative cash flow, that’s a real dangerous situation. There’s nothing wrong with it as long as it’s under control.”
Dixon has been working to get his credit cards under control, even looking into getting a loan to pay all the cards off.
“All the credit cards started dropping your maximums to about what you owed, and then you’re right up against the wall,” he said. “What I’m trying now is to pay them off, [but] it’s a vicious cycle. The guy I used to work for, he was doing this and I thought, ‘He knows better than that,’ but I’ve found I’m in the same boat.”
To break this cycle, Dixon has cut back most of his expenses and is focusing on paying down his credit card with the highest interest rate.
“I’ve got one right now that’s 25 percent, and that’s a killer,” he said. “What you do is set your sights on the card with the [biggest] interest and try to get that taken care of as soon as you can.”
To bring in more cash to pay those cards down, Dixon is charging customers more often during the course of a build.
“When somebody brings something in, I’ll have them leave a deposit and make payments as they go so when the time comes for them to pick it up, it won’t be so bad on them and it will keep me going,” he said.
This is a tactic other shops could consider to generate more cash flow.
“They really need to look at their payment terms from their customers -¦ they want to increase the deposits and frequencies of milestones for payments from the clients so it can support their working capital,” said Jeffrey Sweeney, CEO and managing director of US Capital Partners, a San Francisco-based private investment bank. “They want to increase the frequency of milestones, so a little higher up-front deposit and then more and more often milestones so that their client helps fund the work that’s being done.”
Once Dixon gets his credit cards paid off, he will continue to use them, but only on a limited basis.
“[I will] still use them for buying stuff but try to keep them paid off,” he said. “As [consumer advocate and radio host] Clark Howard says, ‘don’t use them to finance your lifestyle.'”
Using a Credit Line for Purchases
Chris Braun has been able to purchase equipment for Brauns – Muscle and Hot Rod Restoration, the Lomita, California-based machine and restoration shop he opened in 1976, using a business line of credit. He recently used that credit line to purchase a chassis dyno.
“I had a business line of credit set up two years ago for equipment loans and I have to renew it every year or so to make sure it’s valid,” he said. “Once I got the loan, then I ended up going elsewhere and I turned that piece of equipment into a lease, and it was a three-year buyout, so then that gave me my line of credit back. I make payments on the dyno for three years and it’s paid for, and then I got my equipment line of credit back in force, which I may need for emergencies.”
Having the credit line has given Braun the ability to take advantage of good deals on tools and equipment.
“I’m always looking at the auctions to see what I might need that I can buy at basically pennies on the dollar,” he said. “We bought a whole bunch of tooling for the mill and the lathe and some setup equipment and a new welder. The credit line was perfect for that.”
Braun has developed a good relationship with his bank; in fact some bank employees like to come by his shop to check out the latest projects. Pairing that relationship with Braun’s strong financial track record has helped him finance the equipment that he needs.
“I don’t have to tell them what I’m going to buy, they’re not interested in that,” he said. “They know that I’m not going to be stupid and buy a 30-foot yacht. They don’t expect that so [they know] it’s going to be something related to the business…it’s going to be something that’s going to enhance the business and boost sales.”
Being able to show a bank that you’re financially savvy and responsible will help you get financing.
“When you go to a lender to get a loan, they’re not going to make a loan to your business, they’re going to make a loan based on you individually,” said Fairbrother of MBA Consulting Inc. “If you can show them that you know the financial aspects of your business, that you look at your balance sheets every month, that you do profit-and-loss statements every month, then you have a much better chance of getting a loan or financing than anybody else.”
Braun agreed. “[Banks] won’t look at you if you have a bad credit score, [or] if you’re bouncing checks,” he said. “They won’t look at you if you have a deficit account, [or] if your sales are all over the map.”
“They’re looking for consistency and a track record,” Braun continued. “In a recession, a track record is everything. If you can survive a recession then you’re going to make it in good times.”