Financing Options for Security Business Owners
Whether you’re a brand-new security business owner just starting your company or a well-established owner, the need for financing may arise. Alarm business owners need to raise capital for a variety of reasons, including: to grow organically, to open a new office, to make an acquisition, to buy out a partner, etc. Know your options before a need arises to keep your business running smoothly.
Equity financing often comes from investors such as friends, relatives, employees or even customers. Many emerging small businesses rely on equity financing. The most common source of equity funding comes from venture capitalists. These are institutional risk takers and may be groups of wealthy individuals, government-assisted sources, or major financial institutions. Most specialize in one or a few closely related industries. Venture capitalists are different types of investors when compared to your friends or family. The latter want to assist you in getting off the ground, while the former are there to make a return on investment. Before they invest, venture capitalists will look to ensure your company is consistently growing and meeting performance targets while turning a profit.
Debt financing means borrowing money that must be repaid over a period of time, usually with interest. Debt financing can be either short-term, with full repayment due in less than one year, or long-term, with repayment due over a period greater than one year. Unlike equity financing, the lender does not gain an ownership interest in the business, and debt obligations are typically limited to repaying the loan with interest. Loans are most often “secured” by some or all of the assets of the company. In addition, lenders commonly want personal guarantee from the owner in case of default.
Financing through Industry-Specific Lenders
Another option to consider for your alarm business is a security industry-specific lender. The advantage of talking to an industry-specific lender is that they understand your RMR business model. Loan officers at specialty lenders are experienced and judicious about loans they issue. That selectivity is a necessity, as regulators often scrutinize specialty lenders more intensely. One disadvantage of working with a specialty lender is that in the majority of cases, the minimum borrowing amount they will accept is $2MM. If you do find a “boutique” lender that offers loans for less than $1MM, the associated fees tend to be much higher due to their creative/nontraditional lending format.
Accounts Receivable Financing
Accounts receivable funding – a.k.a. “factoring” – is a transaction in which a business sells its accounts receivable, or invoices, to a third party commercial financial company. This is done so that the business can receive cash more quickly than it would by waiting 30 to 60 days for a customer payment. Most factoring companies will purchase your invoices and advance you money very quickly.
If you’re looking to sell RMR and maximize cash, you will likely want to consider a traditional Dealer Program. There are a number of different types of dealer programs, each with diverse offerings. There are manufacturer-sponsored programs, programs offered by national installation contractors, and third-party monitoring programs. A dealer program partnership works best when an owner fully understands how each program works and the individual requirements.
When your business is in a position to raise funds, consider which of the aforementioned financing options is the best fit. For a deeper look into alarm company financing, be sure to read our whitepaper, Alternative Funding Sources.