Financing a new Business
(Tackling the tough job of borrowing money for a start-up business)
You have decided you want to start your own concrete pumping business and all you need is a pump. The good news, and the bad news, is that pumps are expensive. It's good news because if they cost no more than a good used pick-up lots of people would be buying them therefore there would be lots of competition. The bad news is that getting a loan that large is a difficult proposition.
If you've been planning this for years you might have saved up enough cash to buy a pump. If so, good for you, but then you would not be reading this article. Now you are in a hurry to get started and you are going to have to use someone else's money to buy your first pump. It's one thing for you to decide to risk your own money to start your pumping business. It is quite a different thing to convince someone else to risk their money on your success or failure.
Established pumpers, who have been in business for a couple of years, borrow money from an equipment finance company like CIT or from their bank. These lenders base most of their decision to make a loan on the borrower's track record. You're brand new and you don't have one. You need either some way to convince a lender he will get his money back regardless of your success or failure or find some way to pay for the use of a pump without actually buying it.
You might think a lender should not worry about getting their money back because they will get the pump if you don't pay. Not true--equipment depreciates. It will never again be worth as much as it was when you bought it. Further, repossessed equipment seldom sells for what it is worth and the lender takes a bath. Finally, they loaned you the money to get the interest, their profit. When you don't pay they don't profit.
The only way to convince a lender that he will get his money back, without a having a track record (and business equity), is for you to get someone else to guarantee to pay the loan if you don't. This is done by co-signing the loan and the co-signer must have enough financial strength and credit worthiness to satisfy the lender. The co-signer is assuming the risk of your failure and no one is going to do this unless they like you a lot or have their own reasons for wanting you to have a pump.
Who can you get to co-sign a loan so you can buy the pump?
Family members may be able and willing to help. You could borrow the money from them or they could co-sign your loan if they have the financial strength. Remember though, you could fail and leave them on the hook. The Federal Government might guarantee your loan. You may qualify for a small business loan from the SBA through your bank. It takes a lot of planning and paper work but it may be your best bet. It may also take months to get the money but the interest rate will be low. There might be a potential customer, a contractor, or a ready mix company who would find it in their best interest to back your loan. In return they will probably expect you to serve their jobs first and this may limit your competitiveness. You might take a partner who wants to share the profits. You can't do it with a partner who also expects to live off the revenue from your one pump. One pump can't provide enough income to support more than one family, especially during the first years. The pump seller may want to sell the pump badly enough that he will "take recourse" on your loan, that is, promise to take the pump back and pay off the loan if you don't make the payments. He's most likely to do this if you're close enough that he can keep an eye on you. He's going to fear that he will get the machine back, trashed, because you couldn't afford to keep the maintenance up. Don't buy a pump this way from a company with which you will be competing. After you have made the down payment and enough of the payments to begin to build equity, it will be in their best interest that you fail and lose the pump back to them.
Other ways to get the money for a pump.
Occasionally, a manufacturer will offer to carry the financing on a new pump. This can be really tempting but you need to know the dangers.
First, it is very hard to cover the payments for a new pump when it is your only pump.
Second, this is often done for unpopular brands of pumps because it's the only way the manufacturer can sell them. If they can't sell it new you are not going to be able to sell it used, that is, you are going to get hurt when you need to sell it. Pumps that are hard to sell depreciate very fast.
Third, when you are paying off a pump loan you are in a race to accumulate equity by paying back principal faster than the value of the pump depreciates. Lose the race and you are "upside down," you always owe more than what you can sell the pump for. You are in real trouble until the loan is paid off if you need to bail out of the business or borrow money for your second pump.
The seller of a used pump may also carry the financing, that is, you make payments to him. Don't make this kind of a deal with a competitor for the same reasons listed above. You might get a home equity loan but don't be surprised if your wife balks at this idea. Women have a special need to protect the security of their home. You can go to other high-risk lenders. One of my customers borrowed $35,000 from Beneficial Finance to buy his first pump. The interest was high but he got the money. Getting the use of a pump without actually buying is leasing. There are two kinds of leases. The ones from a leasing company are just another form of loan except you might have to put out less "up-front" money, the monthly payments might be a little smaller, and you may pay more interest. Also you never own the pump unless you buy the pump from the leasing company at the end of the lease. Qualifying for this kind of lease is similar to getting a loan.
The other kind of lease is renting the pump from the owner. This is usually too expensive to be profitable and you are not accumulating equity in the pump without a special arrangement.
Before you start approaching lenders and asking people for help, you need a good business plan (read "PLANNING FOR BUSINESS SUCCESS") and you need a good loan application package (read "GETTING A BUSINESS LOAN"). The research and planning suggested in these articles will help you get backing for your loan as well as getting the loan itself. They will also help you be sure you ought to be starting a pumping business and go a long ways toward making you a successful and profitable businessman.
Besides the loan to buy the pump you also need a good-sized chunk of your own money. You will probably need a down payment, which is usually ten to twenty percent of the pump purchase price. You will have to be able to buy insurance, licenses, advertising and communication, tools, spare and repair parts, extra pipe and hose. You will have to be able to cover your operating and living expenses, and pump payments, for 60 to 90 days before you begin to see any real revenue from your pumping service. You should also have a line of credit established to cover any unexpected major expenses.
Financing your first concrete pump is very difficult. You can greatly improve your chances of getting the money and building a profitable business if you go about it in a business-like manner with careful planning. Good luck!
Written By Eisele, Fred UsedConcretePumps.com
Published by ConcretePumping.com