How to Finance your Plumbing Business

Published November 18, 2018 by WC Team

Starting a plumbing business is a good career move in the US these days. As a plumber, you know that your career isn't likely to be outsourced or made obsolete any time soon. The Bureau of Labor Statistics reports that job openings for plumbers are likely to rise by 15.8% in the next eight years, with thousands of plumbers needed each year.

Once you’ve completed your plumber training and apprenticeship or internship course, you might be ready to start your own plumbing business. You’re looking forward to loading up your van with your plumbing tools, and starting to make people’s lives better – one blocked toilet at a time.

What Does it Cost to Start a Plumbing Business?

One of the many advantages of being a plumber is that the startup costs are relatively low. You won’t struggle with a lot of student debt – you can get your training at a community or vocational college which charges a lot less than a red-brick college, and start earning money as soon as you begin your apprenticeship.

You still need some capital to be able to begin your plumbing business. Probably the biggest startup cost for plumbers is plumbing tools. You’ll need to buy general tools, like a plumbers’ wrench, good quality pliers, and a saw, but you’ll also need specialty plumbing tools like a waterfall pump, plumbing snake, and plungers. Some of these tools are more expensive than others.

Although you don’t need to spend a lot of money renting premises, you’ll still need a small office space to manage your paperwork, deal with bills, and keep on top of accounts and invoices.

You don’t have to have a plumbers’ van when you start your plumbing business, but it helps. It's much easier to be able to load your plumbing tools, buckets, and rags into a van than to try to fit it all into the back of a car. Carrying it all on the bus is not a good plan!

You’ll also need to buy business software to handle your accounting, payroll, invoicing, and tax obligations, and you’ll probably want to invest in some marketing when you first set up your business. You’ll get more customers if everyone knows that there’s a new plumber in town.

Why Does a Plumber Need Working Capital?

Every business needs working capital to pay for everyday business costs, and being a plumber is no exception. Working capital is needed to pay for things like:

  • Overhead such as electricity bills, insurance, auto loan repayments
  • Payroll, if you have a plumber’s assistant working for you, or a secretary to manage your jobs
  • Ongoing marketing costs
  • Regular expenses like gas for your van

Working capital is closely linked to your cash flow – ideally, you have plenty of customers who pay you on time. This keeps income rolling into your business, faster than it leaves again to cover your ongoing costs. If your cash flow is positive, you’ll have enough working capital to keep your business running smoothly from day to day.

From time to time, every business needs an extra injection of working capital. Hopefully, you can find this extra capital from your regular cash flow, but business doesn’t always work like that. Sometimes, you might need extra working capital to:

  • Add a new employee
  • Pay your yearly tax bill
  • Buy out a business partner
  • Pay for further training to become a Master Plumber
  • Get certification in eco-friendly plumbing techniques
  • Learn about advanced plumbing technology to recommend to your clients

Additionally, cash flow isn’t always stable all year round. You’ve probably found that there are certain times of year when you have a lot of work – like in the fall, when people discover new leaks – and other times when it’s pretty quiet. Working capital loans help plumbers wait out the slow periods until business picks up again.

The Best Types of Working Capital and Equipment Financing for Plumbers

If your plumber’s business needs a financial boost, whether it’s to grab a new business opportunity, buy new plumbing equipment, or cover gaps in your cash flow, there are plenty of types of loans and financing available.

Unsecured Business Loan

Unsecured business loans are a good option for plumbers, since lenders generally view plumbers’ as a fairly safe loan prospect. You can get short- or long-term business loans, or a business line of credit. Short term loans last for 3-18 months, making them a good option for working capital loans. Long-term business loans typically have terms of between 1 and five years, which is more suitable for buying plumbers' equipment or paying for further training for plumbers.

A business line of credit is a more flexible type of short-term business loan. You'll be approved for a certain maximum loan amount, but unlike a standard business loan, you don't have to withdraw the full loan amount in one go. You can withdraw your loan money whenever you need it, up to the maximum credit limit, and you will only pay interest on the amount you've borrowed at the time. It's best for working capital needs.

Unsecured business loans are best for plumbers with a good personal or business credit score, and at least two years in business, so you'll get the lowest rates.

  • Average APR: 4% to 6% for business loans, 5%-25% for business line of credit
  • Loan process: A few days to a few weeks
  • Minimum credit score: 600
  • Term: 3-18 months for a short-term loan, 1-15 years for a long-term loan, 3-36 months for a business line of credit

Asset-Based Loans

Asset-based loans are business loans that are secured against some item of collateral. Generally, this would be valuable items of equipment, your inventory, or other assets like your van. An auto loan is a type of asset-based loan. Asset-based loans are a good choice for buying equipment, upgrading your tools, or purchasing a van. They are also ideal for business owners with less than perfect credit since the value of your assets is as important as your credit score. The length of the term will vary, but it’s usually determined by the item you’re using for collateral. A loan secured against your van might have a 10-year term, but one secured against your plumbing supplies could have a term of just 2 or 3 years.

You’ll generally only be able to borrow around 50%-85% of the value of your assets, so if you don’t have enough assets in your business, you won’t be able to borrow enough funds to make it worth the cost of processing the loan.

  • Average APR: 7% to 20%
  • Loan process: A few days
  • Minimum credit score: 550
  • Term: Varies

Personal Loan

Most lenders obligate you to have been in business for a period of at least six months before you'll be eligible for a business loan. This means that if your plumbing business is very new, you might not qualify for a business loan, but you could still be eligible for a personal loan. You'll need to have a strong personal credit score for a personal loan, otherwise, you'll risk paying high interest rates.

Personal loans can have repayment terms that last for anything from a few weeks to a number of years. Some have prepayment penalties, which means you’d be charged a fee for repaying them before the end of the term, so read the fine print carefully.

Personal loans could be unsecured, in which case you’ll need a high credit rating to access good interest rates, or they could be secured against collateral like your car, your house, or valuable assets like jewelry or CD accounts. Secured personal loans include remortgaging your home or getting a HELOC against it. Although you can qualify for a secured loan even if you have a poor credit score, you should think very hard before doing so. If you can’t make payments on a secured loan, you could lose the item you’ve put up as collateral. If that’s your home, you could face very serious consequences.

  • Average APR: 4% to 32%
  • Loan process: A few hours to several weeks
  • Minimum credit score: 500 for secured loans, 680+ for unsecured loans
  • Term: 3 months to 10 years

Credit Cards

Business credit cards have their place. Once you’ve been approved for a credit limit, you can access the working capital you need immediately. They are a good choice for short-term purchases and covering small gaps in your working capital.

But the interest rates for credit cards are higher than almost any other loan option, so it’s best not to use them if you can’t pay off the balance in the next month. You could use credit cards to refill your plumbing supply inventory, but they aren’t a good choice for large, expensive plumbers’ tools.

  • Average APR: From 19.99% for new accounts
  • Loan process: online approval can be arranged in minutes
  • Minimum credit score: 700+ for the best rates
  • Term: Monthly billing

SBA Loans

SBA loans are underwritten by the government, which makes it easier for small businesses like plumbers’ businesses to qualify for a loan. SBA loans can be used for working capital needs such as debt financing and plumbing supplies, as well as for equipment financing.

Generally, because SBA loans are government-backed, the interest rates are lower than standard business loans. However, because the government is involved, it also takes longer for your loan application to be approved and for funds to come through. You also need to make a down payment of at least 10%-20% of the total loan amount.

  • Average APR: 7.25% to 11.5%
  • Loan process: Up to 90 days
  • Minimum credit score: 680
  • Term: 25 years

Unofficial Loans

If you have any family or friends who are willing to help you out financially, you could ask them for a business loan to help you buy the equipment you need or keep up with your cash flow. Borrowing from friends and family usually means you won't have to pay interest, and if you're lucky, they might be able to get the funds to you within a few days. However, it does come fraught with the possibility of ruining your relationship, especially if you're not sure how you'll be able to keep up with repayments. You also might need to borrow more money than your friends or relatives have on hand.

  • Average APR: 0%
  • Loan process: Could be a few hours
  • Minimum credit score: Not relevant
  • Term: Varies

Equipment Leasing

Another solution to your working capital and equipment financing needs could be to lease the tools and equipment you need. This solves two problems in one – it frees up your working capital so that you can use it for everyday expenses instead of tying it up buying expensive tools. It also gives you a cost-effective way to get a hold of high-quality equipment.

Equipment leasing is ideal for any items that need regular upgrades – many leasing programs allow you to upgrade your tools on a regular basis. This saves you from having to replace your equipment after just a few years because technology moved on. Many companies also include maintenance and repair costs as part of the overall payments program, which can save you money and worry about what you’ll do if your equipment breaks down.

  • Average APR: Varies
  • Loan process: On the spot to a few days
  • Minimum credit score: Not relevant
  • Term: Usually tied to the life cycle of the equipment

Invoice Factoring

Invoice factoring is a type of short-term working capital loan that is suitable for plumbers’ businesses. It uses your unpaid accounts receivables as collateral for quick financing. You can usually get your funds through in as little as a couple of hours. However, you could end up paying a lot in interest, because the lender will keep increasing rates the longer it takes the customer to pay.

  • Average APR: 1.15%-4.5%
  • Loan process: On the spot to a few days
  • Minimum credit score: Not relevant
  • Term: Usually tied to the life cycle of the equipment

How to Access Funding for Your Plumbing Business

Depending on what type of working capital or equipment financing you need, you could choose between a number of different potential lenders. Here are some of the most reliable options for plumbers who need working capital or equipment financing loans.

Banks

If you’re a good client, your business bank should be your first port of call for a business loan. Banks usually offer short- and long-term business loans, SBA loans, and asset-based loans. Your bank will probably give you better interest rates than you could get elsewhere, but you'll have to wait as much as a few weeks for your application to be processed, and it's hard to be accepted for a loan at all.

Online Lenders

With the rise of financial technology, online lenders are becoming more and more successful. There are many online lenders who offer business loans, SBA loans, equipment financing, business lines of credit, asset-based loans, and invoice factoring. You can also get personal loans from online lenders. Online lenders use advanced algorithms which access your eligibility and respond to your application within minutes. Funds can clear in your account as soon as the next business day. It's a lot easier and faster to be approved for business financing online, but rates can be higher.

Plumbing Equipment Firms

If you're looking for equipment financing, plumbers' equipment merchants could be your best option. Many large equipment firms offer equipment leasing or asset-based financing options that are secured against the tools and supplies you buy. Many plumbers' equipment firms offer on the spot financing, so you don't have to wait to buy your plumbing tools, but take care to read the fine print, because high interest rates and fees mean you could end up paying a lot more than the tools are worth.

Alternative Lenders

Online or offline alternative lenders are neither banks nor plumbing tools’ suppliers. They generally offer short-term loans or invoice factoring. It’s often easy to qualify for financing with an alternative lender, even if you have bad credit, and funds usually clear within a day or two. However, rates and fees can be very, very high, so read the fine print carefully and calculate the overall cost of the loan before you borrow from an alternative lender.

What to Look For When Choosing a Lender for Your Plumbing Business

If you’re trying to choose the best lender for working capital funds or equipment financing for your plumbing tools, supplies, or to expand your business, here are the main things to look for:

  • The overall cost of the loan. The advertised interest rate might be low, but once you add up the cost of arranging the loan, the money you’ll lose as your equipment depreciates, and any other fees, the loan could cost you a lot more.
  • The loan term. Do you want a loan for a few weeks to cover a gap in your working capital, or do you need a longer-term loan to pay for major equipment, master plumber training, or a large tax bill?
  • The eligibility requirements. Do you have the necessary minimum number of years in business, or a high enough credit score, to qualify for a loan from this lender?
  • The flexibility of the loan. Do you want to be able to pay off the loan early without penalties? Or do you need the option of increasing your loan amount at short notice?
  • A reliable lender. If you approach a lender who pressures you to borrow more than you need or has an advertised rate that's a lot higher than the actual cost of the loan, you should be wary.

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