If you've recently started up a contracting business or are in the process of doing so, one important factor to be thinking about will be financing. Starting a business costs money, and there are a few ways you might be able to obtain these funds depending on your financial situation and some other variables.
At Contractors School, we're here to provide numerous resources to both aspiring and current contractors, including several areas of assistance for existing contracting businesses. What are your options for financing your contracting business, what are some benefits and drawbacks of certain formats, and how can you make the right decision on which route to go here? Let's go over a few basics.
Types of Financing to Consider
There are a few types of financing you might consider within the business world. Here are some that may apply to the world of contracting:
- Savings: If you have enough saved up, this can be a great way to finance your contracting business. You'll need to factor in the costs of operating that savings account, but it's generally something that won't cost you anything more - if nothing else, you might need to purchase an investment-type product to make some money off of your funds.
- Investors: Investors are great for businesses looking to grow quickly, but can be fairly touchy when it comes to their money. Generally speaking, you'll have to give up at least some control when dealing with them regarding business decisions, which means that your business might not be growing the way you want it to; this leads to potential problems down the line.
- Credit Cards: This is a fairly bad idea - credit cards are easy to obtain but can be very expensive, and it's incredibly tempting to spend more money than you have in the moment for what might seem like something great, but can easily turn sour if not careful.
- Bank Loans: A much safer option than your average credit card, a bank loan can be a good way to go if you need a large amount of money that will take some time to pay back. Keep in mind that it generally takes longer for your business to become profitable, which means more interest accrued over the life of the loan.
- Grants: An excellent option for businesses just starting out, government grants can be a fantastic way to get your business up and running without having to worry about paying the money back. However, they can be challenging to obtain and are often quite specific in what they cover.
- Contributions from friends and family: This option is only worth considering if you know you have available resources. However, it can be a great way to keep your business free of obligation, and these people are probably willing to help out if they believe in what you're doing.
In some cases, you might combine a few of these options in order to get the money you need for your contracting business. It's important to weigh the pros and cons of each before making a decision and consider what will be the best option for your specific needs.
Benefits and Drawbacks of Business Loans
Because business loans are easily the most common form of financing that new business owners take on, including for contracting businesses, we figured we'd go over them in a bit more detail. Here are some of the typical benefits of going with a business loan:
- Allows you to purchase important equipment, supplies, and other items without paying for them immediately. This includes things like vehicles and tools you need to get the job done.
- Helps your business grow more quickly than it would otherwise be able to.
- Allows you to spread your costs out over a much longer period of time, keeping your monthly costs low so you can keep your business running.
- You typically don't have to pay back early, which means that you don't need to worry about potentially damaging penalties for doing so.
On the flip side, a business loan might not be ideal for everyone. Here are some of the possible downsides:
- Cutting into cash flow: You also have to plan for loan repayment, which typically begins immediately. This means that you might need to cut back on other spending in order to make your monthly payments, which can hamper your business.
- Interest charges: Loans typically have interest charges associated with them, so you'll wind up paying more than the initial amount of the loan over time.
- Losing equity: If you're unable to repay the loan, the bank takes over your business to get their money back. This means that you lose any equity you've built up, which can be a big blow for most contractors who are just starting out with their businesses.
When to Use Savings or Family Assistance
If you have a significant amount of savings built up or someone close to you believes in your business and is willing to help, it might make more sense to use these funds than to take out a business loan for your contracting business. Here are a few specific scenarios:
- Inconsistent income: If your contracting income is still highly inconsistent, you may not have the consistent funds required to pay back business loans, and using other methods could be ideal.
- Low credit: If your credit is too low and keeps you from being eligible for business loans, you might not get the financing you need. Using savings or other means may be more feasible in this case.
- Small loan amount: If your loan is relatively low compared to many others, it might make sense to avoid the extra fees of making payments back on time and risk having fewer consequences if you can't repay.
For more options to consider if your contracting business requires financing or to learn about any of our services for contractors or aspiring contractors, speak to the staff at Contractors School today.