Funding the wait for payment

Owen's business had won a contract to maintain equipment across several commercial sites. On paper the work was good: real margin, a credible customer, and enough of it to justify putting more people on.

The arithmetic underneath it was less comfortable. The customer paid on 60-day terms. Wages fell due every fortnight. Between starting the work and being paid for it sat a gap Owen had to fund himself, and it got wider with every extra person on the roster. Growth was the thing creating the problem.

The first job was to establish what kind of problem it was. We mapped the timing of wages, supplier payments and customer receipts against each other. A business that cannot pay wages because money arrives late is a different animal from one that cannot pay wages because it is losing money, and the two need opposite advice. This was the first.

With Owen's accountant we went through the aged receivables, how concentrated the customer book was, and what margin survived once funding costs came out. Then we compared the two realistic structures side by side: an overdraft, and invoice finance. They differ on more than price. They differ on fees, on what the lender wants reported and how often, on who talks to your customers about collections, and on which invoices are eligible in the first place.

Owen chose invoice finance, with a limit of $250,000 and access tied to the lender's assessment of eligible receivables.

The facility was established before the new roster started, which was the point: a funding line arranged under time pressure prices worse than the same line arranged in advance.

The business could draw against eligible invoices to meet payroll, and those advances cleared as customers paid. Owen kept watching whether the margin on the contract still justified the cost of the facility, which is the right question to keep asking. This is what happened on one facility for one business.

Most growing service businesses do not fail on margin. They fail on timing, and the timing gets worse exactly when the work gets better. If a new contract stretches payment terms past your payroll cycle, sort the funding before the first roster, not after the first shortfall.