As every contractor knows, both money-making opportunities and unexpected situations present themselves on a regular basis. Upgrading your equipment to meet new safety standards, receiving your BPI certification, training a college student to increase your bandwidth during the summer rush, or purchasing new measuring tools to reduce callbacks are all ways to grow your business. There are also times when a van breaks down — with no warning — or a project goes far over budget and you need to react quickly. Having cash available is essential to keeping your business moving forward during both types of situations.

However, it can be difficult keeping extra cash on hand to put toward these situations. Many contractors leave enough to pay a regular cycle of bills, payroll, inventory and rent, while the remainder may become a dividend to your own household. Often, the reality of running your own business is that is the sole means of income for your household. While it usually works out, this practice can leave you in a bind when the unexpected arises.

Financing Options

To make the most of your business, you should understand the different financing options available, which makes the most sense for your needs — and if you are likely to qualify for them. To start, it’s important to have a firm grasp of both your personal and business credit profiles before finding yourself in need of a loan. For example, a bank won’t typically make a loan if your personal credit score isn’t above a certain threshold (a ballpark figure of 680). Here is a breakdown of financing options available based on your qualifications and needs.

Short-term business loan: These are real loans — not merchant cash advances — that enable you to extend payments over six, nine, or 12 months at total costs that are similar or less than long-term financing. The benefits are threefold: 1) it’s based on your business performance and not just personal credit, 2) it requires information that is readily available from your electronic records (bank account, credit card transactions, etc.), and 3) the term is designed to allow you to spread out the payment, but also have it paid down before your next opportunity surfaces. (You don’t want debt stacking up on your business.) Short-term business loans are typically less than $100,000, so new locations and major “soup to nuts” renovations won’t fit the bill. These loans can typically be funded in as fast as seven business days.

Personal credit or assets: More often than not, most of your business credit is based on your personal credit. The benefit is that applying for a commercial card or line of credit is easy. However, there are two main drawbacks.

• If you’ve already drawn on your personal credit, your score may have been impacted (this is not a reflection of you, but rather of the system).

• Loan programs based on personal credit are designed for household use. So while your project or repair may require $40,000, you might only get $4,000. You could borrow against your home; however, this is a difficult and time-consuming option that poses potential risk to the household.

Bank financing: If your project is a full end-to-end renovation, the opening of an entirely new location in a neighboring town, or starting a new business, then a traditional long-term loan is your best fit. However, historically working with the banks has been difficult for small business owners. In addition to assembling the items below, the approval process for a traditional bank loan takes a significant amount of time — anywhere from three to six months.

• Complete financial records (balance sheet, cash flow income statement).

• Business plan and pro forma financial statements.

• Complete tax forms for household and business dating back two to three years.

• Very consistent positive cash flow and other necessary diligence.

For additional insight, check out On Deck’s website,, which has free tools to gain further insight into both your credit profiles and your lending options.

Going forward, always remember that when tackling your next opportunity or emergency, preparation is half the battle. Knowing exactly where you stand credit-wise, as well as what your financing options are, will help your business through its next transition.

Publication date: 6/18/2012