We talked with Morgan Ray, COO of Bookkeeping for Painters, on March 18 for guidance on the best sources of capital in a crisis, along with materials they’ll need to provide a financial institution.
Best Sources of Capital
Start by looking at your account receivables. What work have you completed but haven’t yet been paid for? Try to fill your coffers with cash you’ve already earned. Next would be to check your deposits – work you have on the books but haven’t started yet. Ask for a deposit; 15-20% is typical. Lastly, if customers begin to request to delay work, request a deferred payment or a deposit.
Next, check on your available credit: credit cards, lines of credit and loans. Credit cards are very useful for operating and overhead expenses, but they don’t help when it comes to making payroll. If payroll will become a concern over the next 6 to 12 weeks, look first into a line of credit. The benefit of a line of credit is that funds are available to you, but you’re not paying interest on it until you pull from those funds. That’s the primary difference between a line of credit and a loan. By the way, if you are looking at credit cards, look for one that offers a sign-on bonus or a period of time with 0% interest.
Most importantly, contractors should start these efforts now; don’t wait.
In way of documentation, here’s what you should have ready before you apply for these sources of capital.
Credit Cards: Many applications can be done online, and some offer instant approval, but you’ll likely need to wait 1-2 weeks before the card arrives in the mail. For a business credit card, you’ll need your Employer Identification Number (EIN), along with Social Security numbers and approval from all shareholders in the business. You’ll also need income estimates and a good credit score.
Line of Credit: These can be used for expenses like payroll and you’ll only pay for what you use. You’ll need everything listed above for the credit card, along with financial reports: balance sheets and profit & loss statements for the past 1-2 years. Financial institutions are looking to check your KPIs and your ratios to understand your assets and debts. Good news is, in this business climate, institutions are likely loosening their typical criteria. It’s also helpful if you have signed contracts you can show for upcoming work. And, for lines of credit and loans, you’ll also need two years of tax returns.
SBA Disaster Loans: You’re only eligible for these loans if you’re in an area that has been declared a disaster zone. Before you start that loan process, which can be done online, you’ll need a FEMA Number. Go to www.disasterassitance.gov to register for a FEMA Number. Once you receive that number, go to www.disasterloan.sba.gov to review details on SBA Disaster Loans. Ideally, these loans will have lower interest rates and streamlined application process.
Since our podcast, more information has become available on SBA Loans. Please see more information from Bookkeeping for Painters on this topic here.