Welcome to episode #6 of the Smarter Business Finance Podcast.
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Today I thought we’d talk a little bit about an industry that we do quite a bit of work in.
Helping small to medium construction companies get financing for their businesses.
The last couple of years your industry has been growing like crazy.
Here’s the challenge:
You probably need money, right?
banks don’t really like your business very much…
… and there’s actually a pretty good reason for that.
Now if you’re pretty big it’s less of an issue... but construction booms…
…and then it busts.
And that’s why most banks hate you.
I mean, your financial statements probably look good now (if you have statements).
Your bank statements look better than they have in years.
We all know, though:
Construction will slow down one day
Home building will slow down
What if there’s less tax money to build all those new roads?
Here in 2016, most of you have more work than you know what to do with.
One day… we don’t know what day but we know there’s a day.
You’ll wake up and there’s no more work.
Happens every time.
And so that’s a particular challenge if you’re trying to look for traditional financing, like at a bank.
So..let’s talk about the challenges you face financing a construction business.
You’ll usually need money, whether for equipment leasing or working capital – and here’s what to look for.
Here’s an issue we see a lot:
A lot of times your company is waiting 30, 60 days or more to get paid on the invoices that are out there.
We all know folks that owe you money are going to drag that payment out as far as they possibly can. That’s an interest free loan at your expense.
We’ll talk about that more later… but this is an issue that can wreak havoc on your finances.
Equipment Leasing & Financing for Construction Businesses
The area we really work the most in is equipment leasing and financing.
We finance equipment for contractors and construction companies. We work with both new businesses and established businesses.
You may wonder, if you used to own a contracting company, but went to work for someone else… what does that make you when you are starting up again?
(Yes… a startup…)
Financing is generally difficult for new businesses.
You’re lucky though:
Of all the types of commercial equipment you can finance, construction and other types of heavy equipment are generally the easiest to get approved for.
A small sampling of equipment we’ve helped business owners finance this year:
Can you guess why these items are easier to finance than, say, a popcorn cart?
They don’t depreciate nearly as fast.
If there is a legitimate reason to lend to you… even if you’re a startup… you can get approved to lease construction equipment.
It’s never easy for startups because a lot of folks start a business and aren’t quite ready or aren’t properly capitalized.
“Properly capitalized” means when start a business and have enough money in reserve to get past an oops or two.
I mean – let’s say you want to lease a used dump truck.
But you have no money left over.
Now… pretend that your truck breaks,
You’ve got nothing in the bank.
You don’t have the money to repair it.
You’re out of business.
You stop paying.
Nobody is happy.
That’s why it’s harder as a startup business, but it’s certainly not impossible.
Here’s how you can get approved for construction equipment leasing as a startup:
Usually you want at least a 650 credit score (sometimes 625)
Or… have a serious down payment (often up to 50%)
Or… have collateral … like real estate… or other equipment
Usually, if you’ve got enough down payment or collateral, nobody will care what your credit score is.
With 50% down you can usually get approved even with a 400 credit score.
This will piss you off as a new business owner financing construction machinery:
Equipment financing rates for startups they aren’t great if you compare them to your bank financing.
They totally suck compared to what you’d see at a car dealership.
We mention this a lot – both on the podcast and all over the website.
You want to know why?
Even with the hundreds of ways we spell out what real rates are when you have poor credit or are a startup…
You’ll call us an ask how much are payments on a $40,000 dump truck or something.
And we’ll go and tell you the truth.
You’ll scream bloody murder.
Here’s the deal:
Imagine you’re going to start a business.
You have $10,000 to your name.
You need to finance a $40,000 piece of equipment.
Even if you have good credit, the rate’s not going to be 5%.
There is just no way around it.
We end up taking back and repossessing too many pieces of equipment for a startup business to get approved at cheap rates.
Now, let’s say you have a 700 or 750 credit score.
Except for when someone’s lying to you… you’re going to be pretty steamed when you hear what your payments are.
You’re used to applying for a mortgage. The mortgage is going to be a 3.9% interest rate.
Buying a car? You’ll get a 0% interest rate.
That just doesn’t exist in the business financing world, not for startups.
Now, if you’re buying a brand new piece of equipment… occasionally even startups get fairly decent rates directly from the dealer.
If you go directly in to John Deere and you use John Deere financing sometimes they have pretty cheap rates.
Usually they don’t let you do that if you’re startup.
If you’re buying brand new equipment and you have got five years in business and you have got a 750 credit score… you’ll usually get cheap financing.
That’s because they don’t really care about the financing. They want you to buy the equipment.
They, make money by selling you the equipment.
They can either break even on the financing or in some cases even lose money on the financing and that’s totally cool with them.
They want you to buy that $50,000 brand new skid steer.
If that’s an option for you… go try that before calling a private finance company.
(They’ll beat us every time. We're totally in business to make a profit).
Just like you… equipment leasing companies don’t work for free.
If you’re in the construction industry you probably know exactly what I am talking about.
You’ve surely had too many times where those customers are looking for the cheapest price.
They want to play three contractors off against each other and get them all to lower their price.
You know they’ll eventually get to the one that’s willing to do it for almost free.
That’s the last contractor you want working for you.
Finance is exactly the same.
Go and try to play four different people off against each other just to get the cheapest price so that you can save $7 a month off your payment, off your skid steer, or whatever.
You’re going to get hosed because you will find that quality equipment finance companies will get tired of that game really fast.
You may have guessed:
We are not going to play the cheapest price game.
We are here to:
Give you exemplary service
Give you a fair price (we can’t compete with thieves)
Make sure you’re being dealt with honestly
Help you understand all your options
We’re not going to spend hours and hours begging you to work with us and make next to no profit off the relationship.
You can totally find people who will do that though.
Want to know the problem?
Yes, you will find somebody who is so desperate that he will work on your deal for cheap.
Why is he so desperate?
Either the guys a total failure… or he’s brand new.
Either way… that’s not the dude you want to be working with.
You want to be working with a company who is going to be able to steer you to the best possible solutions.
Someone who has got some experience, some seasoning in the business.
They probably won’t be wanting to work with you for a cut rate price.
…the other thing you run in to is guys that will tell you whatever price because it doesn’t matter what price they, they tell you.
They are planning to rip you off.
I can’t tell you the number of times I have had somebody send a competing quote and I look at the name and know it’s total fraud.
I don’t bad mouth my competitors to anybody… if you call me up and you say,
“ I have got a quote from Dewey Cheatum and Howe Equipment Leasing Company, are they legit, are they crooks? “
I am not going to tell you that they are crooks because that’s not my place.
It’s really hard to prove that somebody is a crook.
I may point out things in your contract to look out for. More often I will just tell somebody to Google them.
Often you’ll come back and say,
“Okay I looked them up. There’s like 50 people complaining about them in the last three months. I don’t know how anybody does business with them.”
That’s what you want to watch out for if you’re just looking for the absolute lowest rate.
I mean get a couple of rates from a couple of different folks just to make sure one is not ridiculously higher than any other ones…
… but if you do play the cheapest price came for too long…
The real guys will sniff you out as a bottom feeder. That means you’re not going to get the service you deserve.
Now … if you’ve been in business for a while and you want to finance some heavy equipment that’s usually not hard.
Some things that can make it hard -- if you have got miserable credit and ten collection agencies are after you …yeah that could be a little tough.
If you have reasonable credit and reasonable cash flow, the rates aren’t even bad.
Now, if you’re buying straight from Deere or any manufacturer that that has the dealership model consider this:
If you’re buying brand new equipment and have good credit you probably want to look at dealer financing first.
Particularly if your credit score exceeds 700 and if you’ve got good financials. Sometimes you can get rock bottom financing.
We can’t compete with free. If you can get free, go get free.
(I will get calls from people sometimes that ask if we have 0% financing and the answer is no obviously….)
So if you have:
Several years in business
Strong cash flow
Decent bank balances
Rates to finance commercial equipment are going to be pretty good.
Sometimes you might even do a true lease.
Let’s say it’s a five-year lease and at the end you have to pay what the equipment is now worth.
That’s totally tax deductible and if you sit down and you do the math with your accountant…a lot of you willl go that route.
That’s because tax breaks generated by calling the payments an operating expense, makes the interest rates actually negative on an effective basis.
PS I am not giving you tax advice. Anything I or anyone else who is not an accountant says check it over, with a real accountant.
Financing Construction Machines With Bad Credit
A lot of you in the construction trades had awesome credit and then 2008 happened.
That means maybe you are looked at like you ran your business wrong.
We all know that often that’s simply not true.
A ton of construction companies really got pummeled eight or nine years ago.
And so the last couple of years we have ended up helping a lot of folks who either have prior bankruptcy or are just cleaning up and you know, now your business is picking up again.
But… there’s all that yucky 2009 on the credit report… old repos and collections and lates.
We can sometimes help you too if you have got that.
Now you’re not going to be as happy with this when you hear what the payments are.
Fact is, though… if you’ve got a credit score in the 500’s… or some other problems… often time your option is pay high rates or rent.
If you’re regularly renting, you know how much that sucks.
We often help folks, let’s say who are renting a Bobcat. Payments can easily be $900 a week.
Then you look at just going and buying a $20,000 Bobcat. Usually the payments might be $800 a month or something and after a few years you own the Bobcat.
Who cares what the rates are?
No matter what that’s better than continuing to rent the equipment.
Loans for Construction Companies
We see this a lot in the construction industry.
You have trouble with your credit…
…or you need money always seem to be waiting on payments from people that owe you money particularly.
A lot of times you may want to look into invoice factoring.
Construction factoring is tricky though.
In the building industries, invoices never end up being really what the invoice is supposed to be.
Most factoring companies are really leery of the construction industry and there are some guys that do specialize in it.
(Not us though)
Getting Money to Start a Construction Company
That’s totally different.
There is, in fact, an awesome program you may be able to access.
Now that doesn’t mean a 690 credit score it means a 700 credit.
Starting a business, you better have a 700+ credit score to be looked at for this program.
…but that can be a great life saver for a lot of people getting in to the business.
Want to know what’s crazy?
Rates are pretty good for that program.
We can’t always get you approved … but when we do get someone approved rates go from 8 to12% which is pretty good… and it’s typically a five- to seven-year loan.
The only negative - there is a big origination fee and it depends on the size, but people aren’t usually happy about the origination fee.
Here’s what we say…
You got approved … for an unsecured loan… to start a business.
This is you:
The other programs we like to look at for the construction industry - for existing businesses there are some decent programs.
In episode 2 of the show we spoke about garbage business loans. You want to avoid those as much as possible.
When you’re on the internet or when someone sends you an advertisement about working capital… a lot of times those guys don’t have you in mind, they have them in mind...
Oh, and they know that as soon as the loan is up, you’re broke.
You’ll need another loan.
So they are going to get the 15% commission a second time (and a third time).
The only one who is not going to make out on that deal is you.
When possible, we like to help you look at better loans than these six and nine and 12 month deals.
Best bets are often two- to five-year business loans with rates starting at 6% or 7%.
Usually they not actually 6% or 7%, but a lot of times they are 10%, 11%, 12% and compared to a 100% interest rate...that’s pretty good.
To qualify, you need:
Decent cash flow
Tax returns showing a business profit
I know your accountant will tell you make it look like you’re losing money. Then you don’t have to pay taxes.
You’ve got a choice.
You can either pay taxes or pay interest.
If you’re willing to send over some financial statements and tax returns you shouldn’t have to do a garbage loan.
Even if you’re in the construction industry, there’s options.
If your credit score is 600 or less, you can still get loans, but they are going to suck.
In any case, your best bet is to always find a company that will give you an honest answer to your honest questions.
To get a quote to finance construction equipment or apply for a loan for your business, call us at (866) 631-9996 or click below