Posted on 10/27/2020 at 07:00 PM by Brian Weckman
5 Tips to Help Electrical Contractors Get Loans
The best quote I’ve ever heard about banking was spoken by comedian Bob Hope years ago: “A bank is a place that will lend you money if you can prove you don’t need it.”
Based on my decades of experience as a financial advisor, I can attest to the truth in that statement.
So how can you boost your approval chances when you approach your banker to get a loan when you actually do need it?
Here are a few tips I’ve learned along the way:
1. Take Out a Loan for the Right Reason
In general, there are only two reasons for electrical contractors to take out loans:
To pay their bills
To build their business – either through expansion, a merger or acquisition, or starting a new business
Obviously, banks aren’t interested in offering loans to help you cover utility bills or make payroll. Instead, they’re interested in loaning money to electrical contractors that are focused on growth.
If you need a loan to maintain solvency (to make your lease payments, for example), your banker is likely to consider that too much of a stretch.
2. Know Your Net Profit Margin
The most important number to your banker is net profit margin: how much net income you generate as a percentage of revenue. This data point helps bankers assess whether your business is generating enough profit to cover operating and overhead costs.
To determine this number, you need to know the profit margin on each job. Electrical estimating software can help with this by allowing you to demonstrate your profitability and track profits on a project-by-project basis, whether it’s a short service call or a months-long new construction project.
If you lack this information and the bank has to attempt to figure out whether you’ll be able to service the debt (your ability to repay the loan and cover monthly payments), your loan may not be considered at all.
3. Don’t Focus Only on You
When you speak with your banker, it can be easy to fall into the trap of talking about how good the loan will be for you and your business.
But the bank isn’t overly concerned with how the loan will fulfill your lifelong dream of becoming an electrical contractor, reduce financial strain, or improve cash flow. They only want to know how the money will help you increase revenue and net profit – and when you’ll be able to pay them back.
4. Consider Loans When You Don’t Need Them
Even if your business doesn’t absolutely need a loan to move forward with your plan, it might be a good idea to take one out anyway. Sign the loan papers for the longest term they’ll give you and then pay it back in a few months. This covers you if you need to temporarily preserve cash flow, but it also positions you as a business owner that your local bank will remember and helps with further building good credit.
When your banker can prove you took out a loan and paid it off quickly, it puts you in a good position and encourages the bank to consider you for other loans later. Banks appreciate new customers, of course, but they love return customers who take out loans year after year – and always pay them back.
5. Be Overly Prepared
Remember to arrive at the bank equipped with everything. Applying for a loan isn’t a negotiation process, so now’s not the time to hold back: Always put your best offer forward. Let your banker know if you have someone who is willing to vouch for you financially. In other words, if someone is willing to cosign your loan, mention that fact up front.
If you have other personal money or assets, share that information right away. If you’re starting a business, bring your business plan with you.
If you withhold important information during initial conversations and the bank says “no,” it’s rare that they’ll revisit the situation after you share more details. Tell them everything upfront so they have what they need to make their decision.
Being as transparent as possible means doing your research. Bringing a list of your accounts receivable, a copy of your most recent cash flow statement, and income statements (or any other financial statements) – along with knowing your gross profit margin and your profitability ratios – will paint you in a more favorable light.
In the end, the bank cares most about your numbers. Are your jobs profitable – and will they continue to be? Do you have enough net profit margin to make your loan payments? If so, then the likelihood of landing a business loan increases.
Electric Ease estimating software helps you quickly, easily, and accurately track job costs, revenue, and profits for electrical projects so you know exactly how you’re doing on each job. Our software brings your project management to the next level, helps track labor hours, expenses, and more, all while saving you time and making reporting a breeze.
Want to streamline your electrical estimating process? Now may be the time to schedule a quick demo to learn more about how Electric Ease can help your business go beyond your goals!
Schedule your demo today to optimize your estimating with Electric Ease!