Interest rates remain close to their historical lows, but financing for many repair shops can remain elusive. Any quest for expansion funding must begin with an understanding of the various types of financing, where those funds may be found and at what cost? What type of funding can best help your expansion dreams become reality?
Generally, there are two basic ways to fund expansion; debt financing or equity financing. With debt financing capital is received in the form of a loan that must be paid back. With equity financing, capital is received in exchange for part ownership in the business.
Equity financing can come from a variety of sources, including the repair shop itself, the owner's pockets, as well as from private investors. (Remember, however, keeping control of your business is more difficult when outside investors are involved.) Equity financing for growth or expansion is more straightforward than subordinated debt financing, as the investor need only be persuaded that the expansion will increase the business's equity.
Getting expansion funding from venture capital firms is a long shot for most shops. There are a number of other sources, however, including so-called "angel" investors, that can be tapped for equity financing.
Originally, a term used to describe investors in Broadway shows, "angel" now refers to anyone who invests his money in an entrepreneurial company (unlike institutional venture capitalists who invest other people's money). Classified as 'angels' would be service providers such as lawyers, insurance agents or accountants. Angels may also be business associates, such as suppliers/vendors, customers, employees and even the competition.
ESOP is no fable
Selling stock in a repair shop does not have to involve strangers. Selling company stock to the operation's employees through an "Employee Stock Ownership Plan" is an often overlooked and usually misunderstood option.
With an ESOP, the incorporated business issues new shares of stock and sells them to an ESOP. The ESOP then borrows funds to buy the stock. The business can use the proceeds from the stock sale to its own benefit — say growth or expansion. The company repays the loan by making tax-deductible contributions to the ESOP. The interest and principal on ESOP loans are tax-deductible, which can reduce the number of pre-tax dollars needed to repay the principal.
A surprising number of businesses today have funds available after paying all of their bills — including taxes. Unfortunately, more commonly, retained earnings are largely wishful thinking. In fact, expanding with internally generated funds can be a difficult process to plan for and implement. The main consideration, obviously, is whether the business has sufficient internal cash flows to pay for expansion outlays.
Often, growth requires additional working capital to finance inventory purchases and accounts receivable that may grow faster than payables, putting the shop in a tight cash position. A revolving line of credit can generally be expanded to accommodate the new credit needs of the business.
A bank is probably the best-known source of funds for most small shops. Typically, banks are the place to go for short-term lending, usually secured by tangible assets. In other situations, however, banks often help in one of two basic ways:
- Commercial banks can help a business increase production by providing funds to secure new equipment.
- Banks can provide working capital lines of credit to help expand cash flow.
Often thought of as a last resort, the U.S. government is actually an excellent source for a wide variety of financing. The federal government has a vested interest in encouraging the growth of small businesses and some loans, particularly those of the Small Business Administration, have less stringent requirements for equity and collateral. Many SBA loans also are for smaller sums than many banks are willing to lend.
Financing will support product growth throughout North America.
R.L. Polk & Co. holdings include Carfax.