You’ve done it!
You’ve landed a BIG contract. The kind of contract that marks the beginning of a new chapter in your business.
Feels great, right?
Now you just need to figure out how to do the work.
You’ll need to hire more cleaners…
And pay those cleaners…
Before the client pays their first bill.
So the question is… can you afford this BIG contract?
Note: If you haven’t closed a big contract YET, check out the first article in this series: Are You Ready to Bid on BIG Contracts?
In this article we’ll look at 7 ways to get the cash you need to pay your employees until the client pays you.
Covering the gap between when you need to pay your cleaners and when you get paid by the client can seem scary, or even impossible. Let’s use some rough numbers to put the problem into perspective.
Let’s say the contract is for $5,000 a month.
If 70% of that will need to cover pay for your employees and supplies, that’s $3,500.
Those employees will need to be paid within 14 days of the work being done.
You invoice right away (something we always recommend doing,) but it takes this client 45 days to pay.
So you need to find somewhere to borrow $3,500 for 31 days.
Totally doable, right?!
(If we just scared the bejeebers out of you, read on. We’ve got ideas!)
1) Tap Into Your Savings
If you had more than $3,500 sitting in your business account you probably would have stopped reading by now, but what about your personal account(s)? Or lines of credit? If you can collect the funds from different sources and use them to cover the payroll for the first month, the monthly profit of $1,500 will have you paid back in just three months!
If you have the funds available in your savings account and they’re earning less than the rate of interest that you’d pay if you borrowed the funds, then this method can take your business to the next level!
It’s always a good idea to keep a bit of cash on hand for a rainy day, so if tapping into your savings would actually mean completely emptying out your savings, give a scroll through the rest of this list first. You never know what emergency might come up before you are able to pay yourself back.
2) Make it a DIY Project
This is the “bootstrapping” option. If you can do the work yourself, at least for the first two months, your cash flow problems are mostly resolved. You’ll still need to buy supplies, but the payroll cost is eliminated.
Plus, if you can get through the first two months of the contract on your own and save the profit from that first bill, you’ll be able to pay the employees who do the work in the third month from your bank account.
This option doesn’t require your money, just your time!
As a business owner you might be completely swamped as it is. Be careful not to take on too much — the only thing worse than losing a bid on a big contract is losing the contract after you’ve won the bid because you didn’t have the time to deliver high quality service.
What if you got paid before you even starting the work? Then you wouldn’t need to borrow anything!
To make it worth their while, ask your new customer if they would like to get a 5% discount ($250 a month) in exchange for paying up front.
That way you still make money on the job but don’t have to borrow to fund it. Plus, you know you’ll get paid. Which is always nice 🙂
If you can convince your customers to pay upfront, your cash flow problems are history!
On the other hand, if you have to discount your services by too much to get the customer to bite you won’t be profitable on the job, and it won’t be worth doing!
4) Credit Cards
This option requires a lot of discipline as it can get out of hand quickly if you’re not careful. Make sure that you understand how your credit card works and how your interest is calculated. Once you get into a cycle of carrying a balance on your credit card and paying interest, it’s hard to get out of that cycle and you can do serious damage to your credit rating.
Let’s say that, in a given month, you have the funds to pay off your credit card balance of $5,000, and that you have a limit of $10,000.
You can “borrow” the funds from your credit card by not paying off the balance.
Rather than paying off the full $5,000, only pay off $1,500. Take the difference ($3,500) and use those funds to pay your employees.
AS SOON AS YOU GET PAID, pay off the remaining $3,500 (plus the interest.)
You should now have about $1,250 left over (assuming there was some interest on the $3,500 that wasn’t paid.)
You’ll need to do this 3-4 times to save up the $3,500 so that you no longer need to “borrow” from your credit card.
If you can put EVERYTHING you spend on your credit card and make minimum payments, you might be able to pull together the cash, or at least some of the cash, to finance the first month of the contract.
This option only works 1) if you have enough space on your credit card that you don’t use on a monthly basis, and 2) if you’re diligent and pay your credit card off as quickly as possible. Otherwise, your interest payments will eat away all of your profits from your job.
5) Talk to Your Bank
If you don’t already have access to $3,500 in the form of a business loan or line of credit, that’s okay. The bank that you work with for your business will likely be open to having a conversation with you about loaning you funds to cover this payroll.
While your business may not have any assets that you can use to secure the loan, the bank may be willing to loan you the funds based on the contract that you’ve just signed for this job.
Of the solutions where you borrow money to fund the timing difference, this is the one with the lowest interest rate.
There are a lot of factors that play into whether or not you’ll get approved on a loan. For instance, how long you’ve been in business. Your bank may require you to have been in business for a few years before they will cut you a cheque. This option can also take too long if you are looking to start the contract right away. Even if you gather up all the documents you need to present the bank within a few days, it can sometimes take banks weeks to approve a small business loan 🙁
6) Family or Friends
Do you have a rich uncle?
Even if you don’t, you may be able to pool $3,500 from a few different family members for 31 days.
Having said that, borrowing from family can get VERY complicated.
My advice: if you’re going to borrow funds from your family for your business, write down the details of the loan and treat it the same as if you were borrowing the money from the bank.
Make sure that you cover:
How much is being loaned
When those funds are to be repaid
What rate of interest applies (yes, you should pay your family interest)
When that interest is to be paid
What happens if you don’t repay the funds on the specified date
Compared to a bank, friends and family (who have the money) will likely provide the funds more quickly and require you to jump through fewer hoops than a financial institution. They will also probably be more flexible with interest rates (although as we said before, you should definitely pay them interest!)
There are some major risks involved with this option. If you don’t repay or if you aren’t clear in setting expectations for how the repayment will go, you could seriously damage your personal relationships. Be sure to write everything down!
7) Receivables Factoring
This is one of the more complicated options.
Once you’ve invoiced your customer, you then sell the right to collect the funds owed to you to a third party — in this case, a factoring business — in exchange for a percentage of the amount owing.
This can be one of the most expensive ways to fund a big job. The effective interest rates can be over 25% — likely higher than the rate on your credit card.
But, it might be worth it if it’s the only way to take your business to the next level.
You can find out more about receivables factoring here: http://www.rtsfinancial.com/guides/what-factoring
Unlike a business loan, factoring is based on the quality of your customers’ credit, not your own credit or business history, and can be a much faster process than getting a loan from a bank.
This option is not only the most complicated, but also has the highest interest rates. This should be one of your last resorts, as the interest rate is so high that you lose a significant part of your profit on the jobs for which you factor the receivable.
Some Final Thoughts…
If you’re going to take on a big contract to take your business to the next level, make sure that you can do the work.
If at all possible, do the work yourself for the first few months. That way you can build up a cash reserve to insulate you from future cash flow timing issues.
If you need to borrow money, make sure that you understand the terms of the loan, especially if it’s a loan from family or friends.
If factoring or “borrowing” from your credit cards are your only options, make sure that you can actually be profitable on the job and pay off that debt as soon as possible. If the debt is outstanding for too long then you run the risk of eliminating all of your profits on the job when you have to pay the interest.
Hope you’ve found this helpful! Good luck!