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A quick fiscal fitness test: What do banks love to see on a balance sheet that most pest control businesses are lacking?

If you’re scratching your head, you probably haven’t tried to get a bank loan lately (or perhaps ever). If you show a bank your fantastic customer list, good luck with that. What banks want is skin in the game. We’re talking about tangible assets.

So, how many trucks do you have? (Gulp.)

“A lot of pest control companies don’t have many tangible assets — it’s just not an asset-heavy business,” says Tim Pollard, chief operating officer, Arrow Exterminators, Atlanta. “Banks don’t like to lend money if there isn’t some kind of collateral or asset they can go get, and while a customer list is extremely valuable to us and what drives the industry from an M&A standpoint, banks aren’t going to lend money on it.”

Then what? PCT magazine asked PMPs how they are financing growth in a 2018 survey. Nineteen percent of respondents said they use a commercial bank to finance business, while 62 percent self-fund growth. The majority (92 percent) of companies use more than one source to finance their business, including other options like community banks, family and friends, credit unions and “other,” which can mean vendor financing.

Is obtaining financing a problem for PMPs? Not really, our survey revealed. For one, 45 percent of respondents reported not trying to get a loan in the last year. Of those that did, 43 percent said getting financing at a reasonable rate was possible.

The key is to consider avenues for financing that fall outside of the traditional banking arena, and to leverage a range of options. And, businesses must maintain a high credit score, have solid financials and come to the lending table with a plan.

“The time to borrow money is when you don’t need it,” says William Mahnic, an associate professor in the department of banking and finance, Case Western Reserve University, Cleveland, Ohio. “If you anticipate you’ll be expanding, or if you are a seasonal business and you know you’ll have liquidity problems in winter, you should plan nine months to a year in advance for that — not the day you run out of money.”

CREDIT AND CASH. If tangible assets are a typical barrier for obtaining traditional bank financing, how can a PMP overcome that? Pollard’s advice: “Find a really good banking partner and develop a relationship with a banker who understands your business.”

Talk to the banker about your cash flow statement. Provide historical information that shows your collections — how much cash your business brings in each month. “You want to have a strong cash position, good cash flow and a strong profit-and-loss statement,” Pollard says.

Credit card payments have improved the cash position for many pest control firms, says Don Gordon, president, PCO Bookkeepers. “Some of the best-run pest control companies have no accounts receivables — and in fact, their AR is negative because they have customer deposits on hand,” he says, calling credit card auto pay a “huge business disruptor” that has been improving cash flow at service businesses for the last decade.

Companies can bill customers upfront for service at the beginning of the month. “They get paid then as opposed to waiting 30 days after the service,” Gordon says. “Remember, cash is king.”

Cash is how nearly half of pest control businesses fund growth. This is certainly the case at Plunkett’s Pest Control in Fridley, Minn., says Stacy O’Reilly, owner. “We do it the old-fashioned way — by saving up the money and then spending it,” she says, noting that planning future investments helps the company target how much it needs to sock away. For example, the business upgraded its offices, creating ergonomic workstations for staff and building a new lunch room. “It did take us 20 years to do this. We’re conservative about how we approach investments, and we save.”

O’Reilly says Plunkett’s maintains a line of credit with the bank, but that’s for emergencies. In terms of financing business acquisitions, the company has negotiated with sellers so they finance a portion of the debt. The seller basically becomes the bank. “To do that, the seller has to be really confident in you as a long-term company that is doing the acquisition for strategic reasons,” she says, referring specifically to the Varment Guard Environmental Services acquisition that closed in February 2018.

“If I had gone to my bank and said, ‘This is an amazing opportunity,’ they probably would have said, ‘O.K., let’s count your trucks,’” O’Reilly quips. “To us, the recurring revenue is a valuable asset, and when I’m buying a business, I want to see that client list. But banks have a very different perspective and different risk profile.”

There are always SBA-backed loans. The Small Business Administration (SBA) guarantees business loans provided at private-sector lenders. SBA can guarantee up to 85 percent of loans, and it offers three different programs for working capital, purchasing inventory or equipment, refinancing debt or buying real estate.

It’s best to choose a lender that makes many SBA loans because there is likely experienced staff on board that understands the process and can usher your application through it successfully, according to NerdWallet, which rates and reports on credit cards, financing tools and bank accounts.

Community banks also can be a viable option for service business owners, Gordon notes. “They are based in your local area and tend to be more flexible,” he says, noting that when lending decisions are made locally, there’s a greater chance of the bank getting to know your business (and perhaps thinking beyond the typical tangible asset). “Community banks are owned by local businesspeople, and if you are well connected, you might know the president of the bank. That’s powerful.”

Again, it’s all about relationships. That’s why Mahnic suggests giving a bank of choice most of your business to raise your profile as a customer. “If you have credits cards, car loans, student loans, a mortgage, savings and checking accounts at one bank, they might try harder to make a loan happen because they don’t want to lose all of that business,” he points out.

CREATIVE FINANCING. There are other ways besides banks and risking cash flow to finance purchases — especially if you maintain solid vender relationships. Need to upgrade the phone system, buy computers or update other office equipment? “Lots of times, you can take advantage of vendors who want to earn their business and might offer a substantial advantage in terms or pricing,” Pollard says. Vendor financing can take on different forms. “They might charge you a monthly fee and give you a couple of years to pay off [the debt],” Pollard says. “Vendors can be creative, and this can be valuable for small companies.” Vendor financing is helpful for large companies, too, like Arrow. “This is a non-traditional way to finance purchases that many people don’t think about,” Pollard says. Your vendors might not offer a financing agreement or monthly payment plan out of the gate. Just ask. “They want you to pay upfront, but if you start asking some questions, they might be willing to work with you,” Pollard says. Arrow takes advantage of fleet financing through an operating lease at one of its banks. “The bank serves as the financing arm,” he says, relating that the company uses different banking partners. “We like to have multiple partners that understand our business because that gives us some flexibility,” he explains. As for alternatives, there are also “hard money lenders” that provide financing at higher interest rates — in the 12- to 14-percent range, Gordon says. Companies also reach out to friends and family. (That is the case for 3 percent of PCT survey respondents.) In an M&A play, this can mean giving a partner ownership. “People will invest in companies that way,” he says, relating that the investment then can fund growth. Some service businesses, including pest control, might find that a valuable customer will help fund growth, Mahnic points out. “If you are a key vendor to one of your customers, and your customer is larger, that customer might lend you money to keep you in business,” he says. Mahnic uses the example of a car dealership. “If you’re the company that cleans up the showroom every night and you get into a cash situation, that dealership might help you.” It’s always best to approach any lender — whether it’s the local bank or your father-in-law — with a solid plan that shows how you use the funds and proves your ability to pay back the money. Do some strategic planning. Mahnic advises, “However you get financing, know how much money you’ll need, when you’ll need it and for how long.” The author is a frequent contributor to PCT magazine.