Looking for money to open or expand a pumping business? A variety of lenders are out there — from your gray-haired grandma to a stranger you met on the internet. Banks, credit unions, investor groups, city and state loan programs are just a few of the financing options available. Choosing the best way to finance a startup is one secret to long-term success.  

Aaron Faulkner, senior vice president at BankFirst, in Green Bay, Wisconsin, encourages entrepreneurs to begin by understanding how a wastewater service business operates. “Make sure you talk to other people in the industry. It pays to reach out to guys who have been there, done that,” he says. 

Experienced pumpers understand working capital. They know how often they are paid, the method of payment, and how to maintain a steady cash flow. Networking with successful pumpers can provide the inside information on the best ways to get a business going. “The more perspectives you can have, the better decision you can make in the long run,” Faulkner says.

The second step to securing financing is to write a high-level business plan. The plan should include strategies for ownership, business management, capital and decision-making. “You need to think things through, so two years down the road you’re not disappointing your bank, your family and your investors,” Faulkner says. 

TENACITY COUNTS

Opening a business is not for the faint of heart. “Nobody goes into business to lose money … but there’s a high percentage of startups that don’t make it. I think one of the biggest success factors is tenacity and the ability to not quit,” he adds.

Unless the business owner has the ability to finance a new venture 100%, the third step is to investigate different avenues for funding. According to Faulkner, each option should be evaluated based on three things: “What’s the cost of the financing, what’s the flexibility, and what’s going to be the best fit at the time?”

Here’s a breakdown of the most common forms of financing.

Borrowing from family and friends can offer flexible repayment terms. For example, Grandma lends you $50,000 at 3% interest and tells you to pay her back when you can. However, relationships can be strained if things don’t pan out like expected. “Draw up a standard agreement so there’s no disappointment on either side,” Faulkner advises.

Borrowing from an investor group may be the best option for startups willing to sell a portion of their company in exchange for capital. 

Microloans are available through business advancement organizations, municipalities and states. Eligibility guidelines vary, but microloans can often be paired with other funding sources.

Internet lending and GoFundMe accounts are becoming more accepted forms of financing, but it’s important to know the terms and conditions before signing up. “Just like any lending, know what your fees are. Understand what your cost of capital is, what your interest rate is, and how long it’s locked in for,” Faulkner says. 

While the internet may be good for the lending, entrepreneurs might find value in forming a relationship with a local lender. “A local relationship can provide some different insight into your business as you get going,” he says.

A home equity line of credit enables funding a business venture through equity in the borrower’s home. Companies can draw against the line of credit if they’re running short and can pay it down as cash comes in. A business line of credit operates in much the same way. “Funds are available to you as you need them, versus having a set term loan,” Faulkner explains. “If we loan you $10,000, once it’s gone, it’s gone.”

Credit cards are the most unstable and expensive way to finance a startup. Credit card payments are typically higher than payments for a line of credit. In addition, high balances on credit cards can negatively impact a business owner’s credit score. “You want to be real protective of your credit. Financing your business on personal credit cards is going to stretch you personally, increase your payments and potentially impact your credit score, which is not the ideal situation when you’re starting your new venture,” Faulkner says.

Commercial lending is a standard method of financing a startup, and Faulkner recommends asking a potential lender a series of questions: What is your focus? Do you work with pumpers? How do you support small business? What financing options are available? Are you a preferred lender with the U.S. Small Business Administration? Do you have experience with SBA loans? 

“Whoever you’re going to be banking with, make sure you’re comfortable sitting down with them and having a conversation,” Faulkner says. “Be sure they’re explaining things in a way that makes sense to you.”

Business owners can finance their startup with a combination of finance types, contributing some of their own money, while keeping some money in their pockets.

“A good, seasoned banker can direct you to some options,” Faulkner concludes.