Financing a business expansion

Discussion in 'Growing and Managing a Business' started by petro, Oct 11, 2012.

  1. petro

    petro
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    We are in the petroleum delivery business in the United States currently and are growing rapidly. We are a very small, profitable company but have a niche in our industry. The owner would like to expand into a new trucking venture that is different from our current business plan in order to diversify. How can we obtain financing for the new venture without capitalizing our existing growth? We need to leverage our current business in order to expand right now. Would setting up a new LLC and creating a business plan be enough? Start up costs will be pretty steap 2-3 million if we start if we build it from scratch.

    I am open to any ideas and thanks for any help.
     
  2. Business Attorney

    Business Attorney
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    I think diversifying into a similar business is a great idea. I don't know what you mean by obtaining "financing for the new venture without capitalizing our existing growth." Do you mean that you don't want to use the assets and income stream of the petroleum delivery business to secure financing for the new trucking venture? If so, then you are probably going to have a very difficult time.

    Even with a business showing expectations of spectacular growth in revenues and profitability, it is still only a plan. Any financial institution is going to look for substantial assets to back up the loan. Assuming you are buying trucks, the trucks themselves can usually be leased with a modest down payment. That is typically the way small trucking companies finance their fleet. However, if you also need cash for operating expenses, that will usually require other collateral or a personal guarantee, and usually both.

    If you don't want to use the existing business to leverage the new business, you will have to look to personal assets or look to raise money from others. That typically means
    private placements of securities under Regulation D. However, unless you have a very compelling business plan, a private placement usually succeeds only when you have family and friends who either have money or have very good contacts with people who have money. The kind of start-up investment you describe is a very tough sell to complete strangers because even the best idea only works if the people behind the idea have the ability to execute the business plan. Most investments like that are made based on the people implementing the idea, not just on the idea itself.
     
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  3. petro

    petro
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    Yes, we prefer not to use our current assets and income stream to secure financing. Would it hinder our current business if we leveraged our current assets and income? We have zero problems getting financing for current expansion of the business and own our own trucks and trailers. Trucks and trailers will be 95% of what we need financing for if we wnt into this new direction. We do not need real estate or property at this time.
     
  4. Business Attorney

    Business Attorney
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    It might be possible to lease trucks and trailers without involving the other business but unless there is a substantial upfront payment (and maybe even if there is one), some type of credit enhancement is probably going to be necessary. That may mean a personal guarantee or other collateral.

    Unfortunately, although trucks and trailers tyoically last for many years, there is an significant drop in value in new equipment as soon as they are placed into service. That means if the lessor needs to repossess and sell the equipment, it is going to get substantially less than the original purchase price. There is a much less significant drop in value if the equipment is purchased used, but there is still the cost of repossessing and selling the equipment. As as result, the lessor is going to look for some type of cushion so that it can recover any decrease in value of the assets through another source, such as the personal guarantee or other pledged assets.
     

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