Securing a loan can be tough if you run a small firm

Tuesday, February 1, 2005

Whether company owners like it or not, most of them are going to need to seek some kind of financing at one point or another in the development of their business.

There are many reasons to secure funding. Some businesses need additional capital to add to their fleet of vehicles, while others could need it to buy security-related equipment for a large project. Sometimes there is a partner to buy out, or a larger building that the company needs to purchase.

But getting that money is not always easy, for companies large and small alike. And it can be especially difficult if you run a small security company with less than $3 million in revenue.

“The shame of its that businessman’s needs are perhaps more intense than the much larger platform,” said Paul Sargenti, chief executive officer of SAFE LP. “It’s the small security dealer that’s creating a lot of value.”

Unfortunately, what makes it tough on small companies is not only tighter controls on funding these days, but there are fewer specialty lenders in the security market who serve smaller alarm companies. And if you turn to a local bank, which typically does not understand the financial nature of the security industry, it makes it even trickier.

“That is a hole that a huge portion of the alarm industry falls into,” said Tony Smith, president of Security Finance Associates.

But if you’re the owner of a small alarm company, there are steps that you can take to make the road towards financing a little easier.

Take stock of your business

According to Jeff Peiper, president and chief executive officer of Financial Security Services, a company that serves the loan needs of the smaller alarm company, make sure your accounts receivables are in order, have a handle on which customers pay on time and which do not, and keep attrition down.

And, if you want to work with your local bank, said Peiper, that type of lender may require audited or reviewed financial statements. The challenge, he said, is that some companies don’t have a positive net worth, but generate cash flow.

“Many of the banks don’t understand the nature of what the collateral is and the cash flow,” he said.

Michael Barnes, partner of Barnes Associates, said it is also a two-way street when it comes to a lack of understanding on the part of an alarm company owner and how the financing industry works. Some installers, he said, do not understand the costs associated with securing a loan, or that some lenders will require a personal guarantee, depending on the size of the alarm company.

“What the dealers too often are doing is walking away from money, thinking it’s too expensive, but it’s not,” he said.

Barnes suggested that before an owner of an alarm company seeks financing, decide what the money will be used for and what kind of payout you can expect by using this capital.

If you’re starting a new marketing campaign with a product that has never been tried, it might be best to forego financing, said Barnes. But if you have a backlog of sales and need financing to buy equipment or hire additional employees, that may be a better situation to borrow money, he said.