Credit and Financing for Screen Printers
Below is an excerpt from my book, “Made to Make It: A Guide To Screen Printing Success.” Learn helpful tips and tricks on how to run a screen printing business.
As your business grows, there will come a point in time where you will need capital. Whether it’s to cover working overhead during slow times; buy equipment; purchase a building; or buy another company—the importance of financial planning is key.
Like many young adults, during my early years when I was playing in my punk band, I didn’t understand financing and credit. I remember Guitar Center sending me a pre-approved in-store credit card for $2000, and going to the store and spending it in a day, then after the 12 month promo period never paying it off. By the time I started Ryonet I had screwed my credit. Because I had never paid my credit cards and was getting sent to collections, I did one of those debt consolidation programs (which you should never do by the way) and ended up hurting my credit even more.
When I started Ryonet, I was 23 years old, had no working capital, had horrible credit, and maxed out credit lines—and I didn’t even realize any of that mattered. I was very fortunate to have a father that believed in me and was willing to advance me some cash off his credit card (despite my mother’s doubts) so that I could build my first business website. He jokes that it was cheaper than sending me to a private college like they did with my brother and sisters—but he didn’t have to, and if he hadn’t you definitely would not be reading this book right now. With his loan, I was able to start a small online business that operated on cash payments collected upfront.
Fueled by hard work; disruptive pricing; internet marketing, and a hunger for screen printing supplies and education in the marketplace—Ryonet grew very fast. Even though I didn’t know it until nine months after the year had finished, (I always waited until the very last possible moment to do finances and pay taxes) we were fortunate to make a moderate profit in Year 1, that soon grew. We went from $200K to $4M, to $8M in gross revenue in less than three years—it was CRAZY! Our rapid growth (which was all paid for upfront) gave me a quick cash conversion cycle, which enabled me to reinvest in more growth.
We were fortunate to not need credit for a long time, which was good because we did not have credit for a long time. I also benefitted from hiring a smart finance guy, Andrew Lee, who took over bookkeeping from my wife Amanda in 2008 and is now a partner. Over the past 12 years, I’ve gone from not knowing anything about financing and credit, to running a company that is fairly financially sophisticated. In 2015, we even opened a financing division. Learning about credit and funding has been a journey for Ryonet. Along the way, there have been failures and successes, and because we achieved more of the latter—we’re where we are today.
Start building now. If you are starting with little or no credit, that’s OK. Start slowly and be smart about it. Get a credit card with a low limit that earns airline miles, that way you can build points while also building your credit! Set your card to auto pay every month to avoid paying too much in interest, or being late. If you carry a balance on your card, ensure that the balance is 50% or less than your credit limit. If you make regular payments (that should always be more than the minimum) and keep your balance at an acceptable level, you should be able to able to request a balance increase in short order or add a second line. You don’t want to open too many credit cards. The trick is to have just a few with favorable terms and to keep those same cards open as long as possible, with a balance that never exceeds 30% of your limit. The goal is to show that you’re worthy of credit and will be a good customer.
Don’t Write Yourself Off
If you’ve had credit, and it’s not in the best shape—don’t give up. You can turn it around. Your first step is to get a free credit report to see what your starting point is. Figure out who you owe money to and negotiate a payment plan. Set up automatic payments out of your bank account to make sure you stick to it. The worst case scenario is that they pass your debt onto collections, write it off, or you end up filing bankruptcy. You need to do everything in your power to avoid this. Believe in yourself and work your ass off and you’ll see the results. I was able to take my credit from a D score to a B in less than a year with this approach, and it felt wonderful. If you can’t avoid bankruptcy, start rebuilding with a secured credit card. Eventually, if you do what you’re supposed to, you’ll have an unsecured one.
Measure Your Progress
You’ve heard me say it a few times now—“What gets measured gets managed.” There are lots of free services you can use to do this. I like creditkarma.com. You might even find keeping track of your credit (and what you can do to improve it) gets a little bit addictive! It’s like playing a game with big rewards. Your credit isn’t the only thing you should be tracking. Take advantage of the free planning tools that come with most investment plans to make sure you’re on track for the day you power all your equipment down and start enjoying your retirement!
Know the Difference Between Good Debt Vs. Bad
There are two schools of thought on business debt. The first is to bootstrap, re-investing your cash into growing the business while staying lean. The second is to borrow, using someone else’s money to grow your business while capturing a profit. Honestly, I think both approaches are valid as long as it’s a choice, not a requirement, that you go one direction vs. the other, AND you are judicious in your actions. The downside to bootstrapping is that you have to have cash to use it—which can limit opportunities and slow growth. Additionally, if you’re not simultaneously building your credit, you may find yourself in a bind. On the flip side, if you strictly rely on credit, and max it out, and something bad happens—even if you have cash, your lender could call in your note, and your business could be gone in less than 30 days.
Personally, I think the best approach is a mixture of both. Use cash when you can. But keep credit available and use it wisely to increase your profits.
Examples of Good Debt
You purchase a machine that saves $5K in overhead and produces $50K per month in finished goods. Financing it at $2.5K per month makes perfect sense.
You have a credit line worth $100K. You receive an order for $50K of shirts that requires you to pre-order inventory. You’re able to accept the order and recoup the interest in your final bill.
You have a credit card (we use the American Express Plum) that allows you to choose between paying your balance in 30 days with 1.5% cash back, or 60 days with no cash return. You pay your vendors at the agreed upon term with your Amex, taking advantage of the extra time to pay the balance in cash, and/or the cash back offer. Over the course of a year, $100K of monthly purchases becomes $18K of cash!
Don’t Be Penny Wise Pound Foolish
I know a lot of companies who have waiting months to execute an equipment upgrade because they were waiting on the SBA or a traditional bank to approve their loan, just to start all over because the lender didn’t understand their business or the piece of equipment they were trying to buy. Those waiting periods can result in thousands of dollars of opportunity costs and missed overhead savings. Put a realistic time frame on how long you’ll wait for financing approval, and be willing to choose a higher interest rate option if it speeds your path to increased revenue or profit.
Create Relationships with the Right People
You should never be afraid to ask for help, or in a position where you have no one to ask. Source a good banker, lender, and financial advisor that you can reach out to when needed, and stay open to other options or proposals.
Understand Your Various Finance Options
When you do decide to take the plunge and invest in equipment, you should know what your options are. Here’s a few pros and cons for you to consider during your planning process.
Take Advantage of the Benefits of Section 179
Did you know that investing in equipment can help you massively reduce your tax liability? That’s right. Section 179 of the tax code allows you to fully-deduct the expense of any equipment that you pay for upfront—either with a finance agreement or capital lease. All of Ryonet’s financing options qualify for this deduction, including our rental program.
Here’s What That Looks Like in Practice
- Your business grosses $250K in revenue for the year as an S-Corp or LLC.
- You end up with a $25K profit at EOY, due to the moderate salary you pay yourself to provide flexibility in cash flow.
- You purchase, lease or rent a ROQ 4 automatic press from Ryonet, qualifying you for a $30K deduction, even if you’ve only made a small down payment.
- You now owe $0 in taxes for the year, saving you approximately $7.5K!
- You reinvest that money in your equipment & install costs and increase the efficiency of your shop!
Like what you read? Get more great business tips on running a screen printing business from my book, “Made to Make It: A Guide To Screen Printing Success.”