Planning, Startups, Stories


Tim Berry on business planning, starting and growing your business, and having a life in the meantime.

Q&A: I Need a Loan to Fill Orders

This is another question I received via the ask-me form on my website:

I have master service agreements with [omitted for confidentiality] in the midwest.  I am also working on an agreement with a company in South America.  I have a great reputation with upper management and they want to use my services.  The only problem I find is carrying payroll until the invoices start coming in, in this case they are net 60.  I literally have facilities telling me here are multimillion dollar contracts, but I cannot afford the payroll.  Any suggestions?

Yes, I do have suggestions. And the problem that solutions depend a lot on who you are, what resources you have, and your past history. Still, here’s my offer of help:

cash flow working capital Shutterstock pot of gold

  1. What you’re running up against is banking law that prevents banks from taking risks with depositors’ money. Banks can loan money for a business plan or a possibility.
  2. The SBA (small business administration) can guarantee up to 70% of the risk so banks can loan you that money without violating the law. You need to submit paperwork, a business plan, and an application. More than 1,000 banks work with the SBA, so there is probably one near you. Ask the small business banks in your area. The deal is done by the bank, but guaranteed by the SBA.
  3. What most entrepreneurs do, if they have the resources, and they can deal with the risk, is borrow off of existing assets. For example, my wife and I had a lien on our house for years to support a credit line for Palo Alto Software. We didn’t like it. It was risky. But we did it, and it worked out, because the company survived and grew. But you can lose your house or whatever assets you pledge, so be very careful. Never bet something you can’t afford to lose. And business is betting. It’s not something I haven’t done myself, but it’s not something I recommend comfortably.
  4. Before Palo Alto Software, when I was still doing business plan consulting, I found a local non-bank financial company to loan me against invoices from a major local corporation. They charged high interest but they advanced me 80% of every invoice and they didn’t take the risk because they had a hold on my bank account and if an invoice hadn’t had been paid (that, thank goodness, never happened) they would have subtracted the amount from my bank account. Google credit line on receivables to see what comes up. And the difference between that situation and yours is I was getting advances on invoices for finished work.
  5. Some people find investors to advance them money for a non-bankable situation in exchange for a high interest rate, a small share of ownership (called an equity kicker), and drastic guarantees that give them your company if you can’t pay the loan. All of the terms are negotiable. Search the web for “angel lending” and see what you come up with. Ask your local small business development center (SBDC), chamber of commerce, or business school if they have any leads. There is no paved road for this kind of transaction, so you have to beat the bushes. This is hard to feet, and a lot will depend on who you are, your resources, your business plan, and your past history. It’s asking people to bet on your future.

(image: shutter stock photo)

  • If you’re the right sized business you might be able to move into the world of asset based lending. You can borrow money against your receivables and gain working capital. I think you’ll need to borrow about $1,000,000 or more to get into this sort of relationship which means you’ll need to have receivables in the $1,300,000 range for most ABL facilities. Just another thing to think about versus factoring your receivables which is a much more expensive route to travel.

  • Robert Reeves

    This is a very informative response. I will be contacting the resources you have suggested.Thanks for another great post.

  • I don’t know if any still do it, but once upon a time (early 2000s) banks would exchange cash for the receivable on a signed contract. Usually the cash would be something like 70% of the value of the contract but you get the cash now and they will collect the receivable later. This has a specific name that is escaping me for the moment. Here in Portland I know Silicon Valley Bank once did these kinds of deals.

    • Thanks Elia. Yesterday I (by coincidence) met a founder of a Eugene (OR) based financial business that does this today, and he calls it “factoring.” I always thought factoring was selling the receivables, with all the risk, for a discounted amount. I suspect my exact definition is out of date and looking for “factoring” might be a good way to start a search. Tim