Why It Pays to Plan: Financing Your Contracting Business

Your contracting operation may be innovative and deliver the highest quality of services to clients. But if you’re not managing your finances properly, the entire operation could unravel. According to a U.S. Banking study, nearly 82 percent of businesses fail because of poor financial management and cash flow problems.

To keep the books balanced and business profitable, every business owner should have a clear financial plan in place. Through enlisting the help of a qualified financial planner, contractors can safeguard their business against the cyclical fluctuations of the construction industry, unforeseen setbacks and the general expenses of a daily operation.

Make a renewed promise to yourself and your company this year to consider the importance of financial management and planning. Below are a number of financial services and solutions that help keep small businesses successful and profitable.

The Importance of Financial Planning for Small Businesses

Planning the finances and funding is essential to keep track of how healthy your business is. Financial planning helps contractors like you prepare for fluctuations and better manage cash flow.

An organized financial management system enables you to:

• Borrow money easily
• Set more realistic and accurate revenue goals
• Better plan your taxes
• Make adjustments to your business model or pricing to become more profitable and efficient
• Retain / attract more investors by being able to provide financial information

Financial management can also ultimately help you make better decisions when it comes to financing. Having your financial information in one place can help you avoid making the wrong credit decisions, or unnecessarily high interest rates that can come as a result of poor financing options.

Learn What Financing Options Will Work Best for Your Business
While there are endless ways to finance your business, there are a handful of options that are better designed for smaller businesses. Some options include:

• Business loans
• Self-financing
• Opening a business line of credit

When it comes to business loans, the Small Business Administration (SBA) offers a number of options ideal for small businesses like yours, including general small business loans (7(a) Loan), microloan programs, and real estate and equipment loans (CDC/504 Loans).

In order to qualify for and receive some small loans, you and your business partner(s) will need to provide a detailed trajectory of your business’ goals and plans. In other words, how will you continue to create a profit?

And while it may sound daunting, self-financing your business is actually a very common and realistic way to keep operations afloat. Some options to self-finance include borrowing against your 401(k) or other IRA plan, getting a home equity loan on a portion of your mortgage that’s been paid off, or simply saving up over time.

It’s important to keep in mind, however, that these self-financing options put you at significant risk. Self-financing often means relying on your expenses to be less than your own personal savings.

Opening a business line of credit is another option to keep a reliable stream of cash flow. Establishing a line of credit between yourself—the borrower—and a bank allows you to access an agreed upon loan balance. Lines of credit are ideal for business owners in need of flexibility—while you may agree on a set maximum amount, there is no requirement to use it all. Borrowers can also adjust their repayment amount and periods, making it easy to adjust to your current business outlook.

How to Find the Right Financial Partner

Finding and vetting the right financial partner and options for your business is a critical component of successful financial management. Some key characteristics you should look for in a potential financial partner include:

• Financial stability and a strong reputation
• Access to needed resources and reliable services
• Overall compatibility and ability to help you achieve your goals

If any type of financial equity is involved, you should do your homework and find out your prospective partner’s financial history. Do your research to learn more about their current debts, their current financial standings and if they’re risk-tolerant.

The reality is, even if your business is currently profitable and in good standing, unexpected setbacks and occurrences can happen. Having a reliable source of funding from a financial partner can help minimize fluctuations and uncertainty.

It’s important to have a discussion upfront, before any agreement is made, on what you both would like to see for the future of the business in five, 10 or more years. While you need funds to keep profits consistent, your financial partner also needs to know their investment is going toward something that will remain profitable long term.