Why Getting a Loan For Your Towing Company is Better than Selling a Piece of Your Business
The decision of getting a loan for your towing company can be a tough one. First of all, you’ve heard it since you were a kid: being in debt is dangerous. From politicians to radio pundits, we’re bombarded with dire warnings about the dangers of too much debt.
Because of this, businesses often choose to avoid taking out loans. Instead, they choose to sell equity in their business when they’re in need of more capital.
Some wait to seek debt financing until it’s too late only to find the process difficult because they didn’t establish credit earlier in the business’ evolution.
The time to repair the roof is when the sun is shining.
― John F. Kennedy
The truth is that it’s better to establish business credit early. You do this by taking out loans in small amounts and paying them off.
Doing this early and often, along with increasing the amount you borrow in small increments over time, will make it easier to get larger amounts of money.
Even better, in most cases, debt works out to be less expensive than raising funds by selling part of your business. Not only is it less expensive, but the debt can be leveraged to aid business growth and future stability.
In a very real way, debt is an investment in your business.
Next, we’ll take a closer look at what sort of impact getting a loan for your towing company could have for your business.
Let’s Do the Math
Over the short term, giving up a piece of your business may appear to be less expensive than debt.
However, if you plan on keeping your business operating for more than a year, you should carefully consider the long-term financial repercussions of selling off a percentage of it – it’s not a decision you can reverse easily, if at all.
Below is an example, the situation can be tailored to virtually any business (it’s a matter of demand and what resources you have available to fulfill that demand).
Suppose you get a massive order and need an initial stockpile of supplies and the equipment required to meet demand.
You‘re going to bill at $50,000.
In order to fulfill the order, you need $20,000 in inventory and supplies.
Benefit Of Getting The Loan And How It Works Out
You could sell off a piece of the company you’re working so hard to build. Or you could take out a loan – incurring interest costs but maintaining your equity
Now, let’s say the loan has an APR of 20%. This means that over a year, the opportunity cost of that loan is $4,000.
At the end of the day, you’re making a $26,000 profit. Some of which can go towards paying off that very same loan.
More than likely, that loan has also enabled you to invest in tools that will be used for future projects. This means the next loan will likely be smaller; if a second loan is needed at all.
Debt can be very profitable if the ROI on the investment is greater than the cost – and you still own 100% of your business.
A Look At It From The Flip Side
On the other hand, you could raise cash by selling some equity in the company.
Because you’re a startup, you may have to sell up to 25% of your business for the $20,000 you need.
Think about what that means.
Even though you didn’t take on debt, you’ll be missing out on 25% of your profit – forever!
Here’s another important factor to remember when you’re figuring out which option is most cost-effective: the $4,000 interest on your loan is tax deductible! Depending on the size and its interest rate, your loan could make a considerable difference in tax burden that year.
Selling equity provides no such tax savings.
Equity Financing Can Slow Down Operations (Well Beyond the Sale)
If you do decide to go with equity financing, it’s important to also factor in the amount of time that will be spent on your investors – before and after the equity is sold.
Initially, you’ll need to attract those who are actually want to invest in your company.
This means not only finding people who want to give you money, you may have to make them potential partners. Make this decision carefully, as you’ll need to include them in most – or all – future decisions, for as long as they hold their stake.
By choosing equity finance, you’ll essentially be choosing to have co-owners of the business.
Even if you hold a majority share, you’ll still need to involve them in decisions. You’ll need to allow them insight into the growth and operations of the business. Also, you’ll need to convince them of changes as they’re made. Not to mention, sharing your profits with them along the way.
Debt Builds Up a Useful Resource: Business Credit
As mentioned above, taking on business debt, paying regularly and on time is critical for improving your business credit score. This technique is so effective, it’s become common for businesses that foresee the potential for large loans. They take out smaller loans that they don’t need, simply to improve their credit profile.
Even if you don’t foresee needing a loan in the future, it’s wise to improve your credit score. You never know what lies ahead. Your business can experience unexpected turbulence or require emergency expenses.
Planning Ahead – For Good And Bad – Keeps You In Business
Whether because of disaster or rapid growth, it’s quite common to realize that you’ll need a large influx of capital for your business to survive and thrive. Unless your business has a healthy credit profile, your only option may be equity financing; and that may mean selling a considerable, if not a majority, share of your company.
You should view debt as an important and vital business tool. As with any tool, you’ll need to use it properly. Always pay on time, and don’t take on debt you’re unable to manage. However, if done correctly, a loan can do a lot more than allow you to invest in your company; debt can serve as a building block for business stability and growth for years to come.
You bust your butt to build your business, why give a piece of it away. Getting a loan for your towing company keeps you in control, not investors.
When it comes to the towing business, you have busy times and slow times, which can be scary. When deciding if getting a loan for your towing company is the right thing but you worry about slow times, do this… Look at your last two years of monthly revenue.
You can find your average total revenue by adding up all 24 months, then divide that by 24. That is your total average monthly revenue per month over the past two years.
Use Our Free Calculator
You can use our free calculator to determine a rough monthly repayment and total cost of the loan.
You can access the calculator here: Click Here to Estimate Your Monthly Payment
Can meet the monthly payment and afford to operate your business? Then getting a loan for your towing company might just be the right choice.
How Tow Dough Can Help
Thinking about getting a loan for your towing company? Tow Dough can help you finance your new or used tow truck with ease. If you want to learn more about how we help towing companies feel free to check out our two-minute explainer video by clicking here. See How Tow Dough Helps Towing Companies Finance Tow Trucks.