Horse professionals probably understand better than most that it “takes money to make money.” From horse care to facility management to equipment purchases, the daily overhead expenses for boarding and training can be steep. Add a business expansion into the mix, and the costs can skyrocket.
This leads to a predicament many stable owners face: Business is bursting at the seams, but profit margins are too slim to support additional infrastructure. One way to overcome this obstacle is to apply for a business loan. However, going into debt to expand your business versus leading with revenue involves risk. It’s an important decision that deserves some due diligence.
First and foremost, you should determine whether you need a loan or a line of credit—or both—to support your business. Typically, a loan covers big-purchase items (real estate, construction, equipment), whereas a line of credit is used for payroll and other routine business expenses when receivables are slow coming in.
If you decide that a loan is the right way to go, you should take a realistic look at your accounting books to gauge your ability to repay it.
“If you’re operating at a marginal level, a loan will give you more working capital, but it also will give you more debt to service,” says Manuel Gonzalez, district director for the Small Business Administration (SBA) office in Houston, Texas. “This means you’ll have to make more profit to pay back the debt you’ve incurred. And remember, a bigger operation means increased overhead expenditures—and that will come out of your profit, too.”
It’s important to understand that even for businesses in good standing, taking out a loan involves some degree of risk. But the risk can be kept to a minimum if you plan and prepare.
Before you approach a lender, you need to know exactly how the additional working capital will enhance your business. For instance, what will you purchase with the loan, and how will this purchase improve operations and increase profits? You can bet that lenders will ask these questions, and if you can provide a solid game plan in writing, your chances of receiving a loan increase greatly.
“A lender also will want to see a short summary on the company’s management,” Gonzalez says. “This statement will show the management’s expertise and history in the field.”
Justin Pritchard, a banking and loans expert for About.com, agrees. “I strongly suggest that you prepare a plan with as much detail as possible, including bios of you and your partners, your track record, your strategies and advantages, and more,” Pritchard says. “Banks award small-business loans to those who have everything spelled out and planned.”
Gonzalez says that lenders also typically request at least two or three tax returns and a year-end profit-and-loss statement. (If you apply for a loan in the middle of the year, the lender will want to see a “stub,” which reflects the standing of the business in the last quarter.)
Pritchard adds that if you really want to wow your lender, a pro-forma statement is in order. These statements give projections of what your business will be worth moving forward.
If this seems like a lot of legwork, that’s because it is. Remember: Lenders are risk-takers, but they’re also for-profit businesses that make money by making wise investments. The more documentation you can provide to prove your ability to repay a loan, the more favorable you are in the eyes of the lender.
According to Gonzalez, preparing your supporting documents isn’t a task you have to face alone. The SBA has offices in every state, and there are Small Business Development Centers that will help you prepare your statements and calculate your business projections free of charge.
“Most businesses are busy making a living and trying to make payroll, so working with a SBDC counselor can save you a lot of heartache in paying an accountant to help you get your paperwork in order,” he says. “These are your tax dollars at work. We’re here to support you in your business expansion needs.”
The SBA not only can help you apply for a loan, but it also can play the role of a guarantor. “We’re sort of like a rich uncle who co-signs on your loan,” Gonzalez explains. “If the bank is looking only at you, the risk is greater. However, with the SBA stepping up to the plate on your behalf, the risk is mitigated.” For loans of less than $150,000, the SBA will guarantee 85 percent, Gonzalez says. For loans more than $150,000, the SBA guarantees 75 percent.
But the SBA isn’t the only helping hand on the block. Oftentimes, strong relationships with hometown banks can prove invaluable. When Dan and Sabina Pish of Dan Pish Racing in San Antonio, Texas, decided to borrow $24,000 to buy an auto equine exerciser, they approached the bank that handles their personal and business accounts. Sabina says the loan officer was instrumental in helping the Pishes prepare and organize their loan application and supporting documentation.
“We had to prepare an extensive financial statement for the bank, including whether or not we had wills and powers of attorney,” says Sabina, who with her husband owns a thoroughbred race-horse training operation. The business employs 30 people and trains approximately 80 horses year-round. She says working with their hometown bank made the loan process easier to tackle and complete.
Pritchard and Gonzalez agree that it’s smart to approach the financial institution where you do your banking, whether it’s personal, business or both. “These places know your history and financial behavior, and they’re more likely to grant small-business loans to those who have demonstrated financial responsibility,” Pritchard says. “A big part of the bank’s risk is uncertainty regarding loan repayment. If they can reduce uncertainty about you, you’re in a better position.”
But what if you don’t want to approach your bank for a loan? Pritchard recommends seeking out small credit unions, where you more easily can approach high-level decision makers to plead your case. Also, check the newspapers for financial institutions that are proactively advertising for new business.
Another option is to surf the Web for lenders. There are numerous sites that specialize in matching borrowers with lenders, and some of them—such as Buyerzone.com—are in the market specifically to help businesses. Most of these sites offer their services for free. The lenders typically pay a fee to the referral service in return for the connection to the potential customer.
“We specialize in helping businesses find the right providers for general business loans, commercial mortgages and equipment leases,” says Scott Healy, vice president of marketing and product management for Buyerzone.com. “We work with more than 50 lenders, both regional and national.”
Healy says the advantage of using a resource like Buyerzone.com is that you will be connected with multiple lenders simultaneously. This creates an environment where lenders are competing to win your business, which can translate to more favorable terms and lower interest rates.
However, if you decide to step outside your existing banking relationship to apply for a loan, be aware that you’ll likely have some additional explaining to do. “If you’re not dealing with a rural or country bank that regularly provides loans to farmers, ranchers and other agricultural entities, be prepared to explain your business in layman’s terms,” advises Sabina. “Many city banks do not understand the details of our business.
“Also, try to deal with the same loan officer once you start working with a bank. After a few business dealings, each transaction will become easier.”