When starting any kind of business, including a contracting company, you’ll typically need a reasonable sum of money for startup and associated costs. There are a few ways you may go about obtaining these funds, and one of the most common is through one of a few different forms of financing.
At QuickED, we’re happy to offer a variety of resources for contractors in Utah, from license renewal solutions and forms of continuing education to many areas of expertise for those looking to start up their own contracting business. What are some of the most well-known types of financing out there for contracting and other businesses, and which might be best for you? Here are some basic areas to consider.
Types of Financing
Like for most other businesses just getting started, there are a few different methods of obtaining financing for your contracting business:
- Loans: Likely the most common form of financing, loans are generally paid back to the lender over time using a predetermined payment schedule. There are many different options available for loans, including lines of credit or establishment of business credit through various banks and lending companies. Qualification for loans will involve a variety of different factors, such as credit score and cash flow analysis of your business.
- Investors: In some other cases, you may look to other individuals or business entities to invest their money in your business. When seeking investors, you’ll need to be able to offer something in return for their investment. This may include promising an equity stake through offering common stock or other shares. However, investors may also assist with paying for some of the costs associated with launching your company by covering specific expenses, such as starting materials and equipment.
- Small business grants: If you’re eligible, some small businesses can obtain grant money from various sources such as government programs or non-profit organizations. These may be awarded through a competitive process or based on specific eligibility requirements for your business. While these financing options may not cover the full amount of required expenses for your contracting company, they may help support early-stage expenses for new business development.
- Lines of credit: These are another common form of financing for small businesses, which are basically lines of credit offered by financial institutions. When you have a line of credit established with your lender, you can draw upon the funds available to pay for expenses related to your contracting business. However, this type of financing is usually not intended to cover all costs associated with starting up and running a contracting company.
- Family and friends: If you already know someone who supports your business or offers to invest, this may provide an alternative option to consider. This route may be somewhat more challenging, as you will need to consider the impact on personal relationships associated with asking for money for your contracting company.
- Savings: Finally, one of the most common ways to obtain financing for your contracting company is through personal savings. Of course, this involves having sufficient funds set aside. However, you’ll still want to consider other forms of financing as well, especially since you may be limited in how much funding you can obtain from a single source.
Benefits and Drawbacks of Financing
To be clear, financing won’t be for every contracting business owner — there are some situations where it either won’t be necessary or might not be prudent. But there are also many cases where it will. Some of the benefits of financing for your contracting business include:
- Equipment purchases: One of the main reasons to seek financing for your contracting company is to purchase equipment needed for production, especially if this equipment has high initial costs.
- Seed money: A loan or investment of some kind may be necessary for startups of businesses in general, including contracting companies.
- Spreading costs out over time: Because many small business loans and other financing options are paid back over time, the costs associated with starting up your contracting business can be spread out.
And while it’s not necessarily a “drawback” per se, the fact that financing must eventually be repaid in nearly every case is an important consideration. You need to be sure that you’re going to be capable of paying back all of your financing, as well as any interest charges you may accrue.
This is especially true when considering very expensive forms of equipment for your contracting business, such as high-end tools or machines. Purchasing this type of equipment can often result in loans with repayment terms spanning five years or more, which are not exactly the most attractive option.
When to Go With Savings
While we included savings in our methods of financing listed above, it has some very notable differences to other formats — namely that the money is coming from you alone, and not from other sources. While you might not always have enough funds saved up to do this, those who do may utilize this method in a few situations:
- Your business income is unpredictable, making repayment of loans or other forms of financing more challenging.
- You don’t need large amounts of startup cash to get your contracting company up and running, or save enough to purchase equipment purchases.
- Your business is already established, so you won’t require seed money for initial expenses.
- Loan terms are too short or expensive for you to manage.
For more on the considerations you should be making if you’re thinking about financing for your contracting business, or to learn about any of our continuing education programs or other services to contractors in Utah, speak to the team at QuickED today.