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BORROW TO GROW

Strange as it may sound, borrowing money is usually the most sensible way to expand a pest management business.

Let’s get one thing straight from the start: borrowing money is not a sign of business weakness. Over the last few years many people thought that it was a last ditch attempt to save an otherwise hopeless venture, but conversely, borrowing can be crucial for growth. For your pest management operation, borrowing could be looked upon as a catalyst for expansion, as well as a buffer for financial setbacks. Certainly for a new business, borrowing can be crucial in building the business up from nothing into a solid and profitable venture.

In most of this industry, the likelihood of continuous guaranteed profits is highly unlikely due to a variety of circumstances, such as competition, weather and economic factors – as such, there is often too much uncertainty for outside investment capital. As such, your bank or finance company should be your first port of call for borrowing.

What are the benefits of borrowing?

The cost of borrowing can be profitable. Indeed in most cases it should be, as that is the purpose of most borrowing. If the funds borrowed are used in an efficient manner then it is likely that the rate of return you can expect to earn from the borrowed funds will be greater than the cost. Remember, interest payments on business borrowings are tax deductible, so part of the costs of borrowing are actually subsidised.

Borrowing is more flexible than investing funds from your own bank account or investments. By not tying up all of your own funds in the business, you maintain a continuous pool of available liquid assets. This way, you can take advantage of short-term business opportunities and can use these liquid assets as a source of reserve emergency funds when needed.

Also, loans are generally easier and quicker to access than utilising equity (selling part of the business), due to the goodwill calculations, asset valuations and legal negotiations required.

Can I apply for a loan for my business?

Whilst these are the principle benefits of borrowing, it is not correct to say that borrowing is easy. Quite the contrary – borrowing money means proving to a potential lender that you and your pest management business are good prospects. The lender will need to be assured that your business will be successful so that you can repay the loan and adhere to the lender’s ongoing requirements. Provided you meet their security requirements, lenders are willing to put up the money because they will have first claim on your assets and income.

However, the chances of running in off the street and obtaining an emergency business loan from your bank or finance company in today’s lending climate is slim to say the least. Successful borrowing demands developing – in advance – a sound working relationship with your existing lender and potential lenders. The failure to establish timely, accessible and good lines of credit exposes the business to financial strangulation, often at the very time the money is needed most.

It means letting the bank know details about your business and how it is positioned financially now and your plans for the future, and I don’t just mean having a chat over the counter. The formulation of a business plan is crucial, not just for providing the bank with the information it seeks on an ongoing basis, but also for your own good management practice.

A good business plan describes the structure of the business, past history, profit and cash flow projections, and gives a comparison of latest financial results to previous years and preferably to industry averages. If possible, it’s a good idea to supply an updated business plan each year to establish your business as a reliable commercial venture in the eyes of your lender.

By developing a good relationship with your lender, you give yourself the best chance of obtaining finance when you need it.

Peter Cox, Peter M Cox & Associates