Making your first big sale certainly gives you good reason for celebration, but the project you’ve worked so hard to land often brings its own challenges, particularly in the area of working capital.
Though OPEN Forum community member Kimberly Moore recently earned a substantial seven-figure contract for her three-year-old company, the president and engineering manager of KDM Engineering faces the common dilemma of insufficient capital to service the contract.
“Because of previous smaller projects and smaller profits, we don't have the capital to sustain the initial hiring payroll and equipment costs (computers and software),” Moore says. “Banks are telling us we need to show the ability to handle more money before they lend to us (we are only seeking a $50,000 line of credit) or that we are still too new to lend to.”
Moore asks the OPEN Forum community: “How do we grow and take on more projects to show we can handle more capital if we never are granted the opportunity in the first place? Anyone experienced this Catch 22 with growth and financing?”
Ask for a Deposit
If the customer offering the large contract is willing to pay a deposit on the work to be done, this may be a good way to infuse necessary cash into the project, says OPEN Forum community member Brian Dineen, senior partner of Trinity Capital Solutions: “A deposit could be a way to accelerate cash flow and cover those initial expenses.”
OPEN Forum community member Cathy Campo, president and owner of Websites and Marketing Services, agrees. “Since they are already a client, they know you are a relatively new company. They also must like your work or they wouldn't be offering you this larger job. Be honest. Let them know that because of the size of the project you will need to hire additional help and will need to have a deposit to cover initial costs. Also, be honest with the people you hire for the project and let them know as well that you will be paying as the project goes and collecting money from the client. If you are honest across the board, everything will work out.”
Seek Credit from Vendors
“Getting credit is the answer,” says OPEN Forum community member Zachariah Logan, senior vice president of Ammonia Industrial Refrigeration. “You can have all the capital in the world, but cash (capital) is just a barrier,” he says. “The real money comes into play when you get your vendors to front your expenses on the project. It usually takes paperwork and networking, but that is how any real company makes it big.”
Dineen has similar advice for securing credit. “See if you can work out terms with an equipment seller,” he says. “Perhaps they will be willing to provide some financing in exchange for getting your business.”
Inquire about a Microloan
The Small Business Administration (SBA) offers microloans to small businesses for situations such as Moore’s. Its Microloan Program gives loans up to $50,000 to assist small businesses in expanding. The average microloan is $13,000. Because the loans are serviced by lenders designated by the SBA, eligibility requirements vary somewhat. These loans can be used for working capital, as well as inventory or supplies, equipment and machinery and furniture or fixtures.
Seek an Angel Investor to Back a Bank Loan
If you have access to a wealthy individual with credit who believes in what you’re doing but isn't ready to give you cash, ask the person to guarantee a bank loan for your company. Such loans generally have a somewhat short term, so determine if you're able to pay the loan off in time before signing.
When you accept a large contract, ensuring that your company is running efficiently and smoothly is top priority, says OPEN Forum community member Michelle Anderson, director of operations for Healthcare Interactive.
“Focus on well-managed processes. Drive efficiency in current operations to free up time and resources as much as possible,” says Anderson, who also suggests strategically prioritizing. “You can't do it all, but you can align your resources against the projects that will have the biggest payoff in the long term.”
Read more articles on small business financing.