Last year our environmental-waste-packaging firm accepted a $50,000 job with the state that ballooned into a $300,000 monster. We completed the work, but it has left our company almost broke. And now the state is withholding payment.
Meanwhile, we've attracted some very big corporate clients, but we need operating cash. The debacle with the state spoiled our bank credit, and no one else is lending money. We don't want to lose control to a venture capitalist. Are there alternatives?
Customers offer the cheapest financing, according to CEO James Malot. His company, Terra Vac, a $12-million environmental-cleanup firm in San Juan, P.R., placed #284 on our 1991 Inc . 500 list. He got customers to finance his growth by paying part of his fee up front and the rest as he completed the work.
"Clients understand the cash-flow problems imposed on a small company and are willing to work with you," Malot says. "Three out of four times, they'll agree." Malot's company provides on-site treatment, and design and installation constitute most of his costs. An up-front payment of 20% pays for labor and materials. Upon installation, Malot expects another 25%; when the first phase is completed, another quarter; and when the client is satisfied, the remainder. "They feel they've gotten a fat hold-back fee," which needn't be paid until they're happy, "and we've managed most of our costs."
Tom Weaver, president of Prosys, a $4.5-million on-site waste-water-treatment firm in Chelmsford, Mass., asks for 30% to 40% upon receipt of the purchase order on every job. His price is low, he says, "and I tell the client, 'You're going to help me finance that price.' "
Weaver suggests that for every job, you write up a spreadsheet identifying important dates for the project. Ask yourself what bills you'll have to pay by each date. Figure out the percentage of the project that you want paid by your key dates. "Then you can tell the client what it's purchased, so if you fold up shop after the equipment comes in, it owns the equipment, and it can get another job shop to finish the job," Weaver says. (For more on customer financing, see "There's No Harm in Asking," Banking and Capital, June 1991, [Article link].)
You could also finance against your receivables with a bank or a factor. Malot typically gets bank loans for 70% to 80% of his receivables that are less than 60 days from billing. But the bank screens out government agencies because they are slow to pay. Banks should find big corporate receivables appealing, however, especially if you've tied them to an aggressive payment schedule like the one outlined above. Factors buy your receivables from you and handle collection, but they charge you more the longer it takes to collect. A factor's services will cost far more than a bank's. Also, some clients will require you to get their approval before you turn their account over to a factor. (See "Quick Cash," Capital, March 1991, [Article link] and "Spot Factoring," Banking and Capital, July 1991, [Article link].)
As a more drastic option, Bill Lorenz, a consultant in Concord, N.H., suggests you seek an affiliation with a related company that can infuse cash into your business. The Green Book, in Wilmington, Mass. (617-935-4800), publishes directories of environmental products, services, and consultants. Lorenz suggests you check that or the grander World Environmental Directory (Business Publishers, Silver Spring, Md., 301-587-6300, $225) for leads.
In any case, Lorenz thinks you should seek advice so you can avoid another debacle. The National Solid Waste Management Association, in Washington, D.C. (202-659-4613), which publishes Waste Age magazine, offers educational materials and has 2,500 experienced members. Lorenz's last tip: don't rely on government work. "When the government offers you a big plum, it's so easy to take a bite. But I've heard these stories too many times." n