In an ideal world, building service contracting firms would have all of the gross income they needed to earn a comfortable living, pay their obligations and be able to grow their business. Of course, this isn’t an ideal world. Cash flow for many BSCs is tight, making it difficult to make payroll, let alone expand into other markets, buy a building or start up a new account.

“It takes a longer term in a very successful company to have accumulated enough money to actually use it [for] growth,” says Allan Claybon, a former chief financial officer of a cleaning firm in Cincinnati. That’s because many BSCs must buy equipment and pay their staffs up-front, before the customer pays his first bill.

“If you sell $10,000 in monthly business, you need $15,000 in cash to produce it,” Claybon continues. “Many BSCs do not bill until the end of the month of service, and are not paid for as much as an additional 30 days. Payroll and related taxes can amount to as much as 70 percent of the sales dollar. Thus, the cash required to meet the payroll for this period exceeds the monthly volume. If you need to buy supplies and equipment up front, that could bring even more demand. In order to grow successfully, it can take a lot of cash in this business.”

Also, BSCs using certain tax structures, such as the “S” corporation, must pay out profit to their shareholders, rather than reinvest it in the business, so capital for growth must come from elsewhere.

Compare and contrast
And for that, BSCs have a few options, including debt financing and equity capital. Debt financing includes bank loans, credit cards and loans from agencies such as the Small Business Administration. Loans often are secured by company assets (such as a mortgage on a building), and are paid off over a fixed time frame, with interest.

Equity capital, on the other hand, is provided by venture capitalists (VCs) or angel investors. Venture capitalists run funds, where angel investors will provide their own money; both contribute in exchange for an ownership stake in the company.

Sometimes, an angel investor will take a managerial or advisory role in the company; a VC will usually be more hands-off. If the company fails, the investor loses. Because of the risk involved, equity investors are likely to want a higher return on investment than a lender would require.

In the vast majority of cases, experts recommend tried-and-true debt capital. Interest rates are competitive, the terms of the loan are clear and business owners retain complete control of their business, says Dr. Ron Cohn, owner of Ralston Consulting Group in Salt Lake City.

On the other hand, businesses wanting to grow quickly might find investment capital, including venture capital, more to their liking.

“If you’re a $25 million dollar company, and you want to go to $40 million, a bank loan’s not going to get you there,” says Cohn. “If you want to grow exponentially, go to a VC. But the downside is you lose control. The VC determines expectations of profitability and may possibly require a liquidity event [i.e. require you to sell your company to pay them back]. If you grow, the venture capitalist takes a chunk; with a bank loan, it’s all yours.”

But most BSCs probably won’t have a lot of luck finding VCs willing to invest in their business — cleaning margins tend to be small, and venture capitalists will generally look to more profitable sectors.

Be prepared
To obtain just about any type of outside financing, BSCs will need to be prepared.

Venture capitalists and traditional banks alike require documentation before they’ll grant any company financing, although the exact type will differ, depending on the institution and the amount of money desired. Both probably will ask for quarter-by-quarter balance sheets, long-term contract history and projections.

“Venture capitalists are more interested in the quality and caliber of your senior management team, and will be asking more questions than a bank,” adds Cohn.

Typically, though, small- and mid-size BSCs don’t have the resources to prepare all of the documents needed to apply for financing; Claybon recommends tapping an outside firm. Smaller companies might be able to use their accounting software to handle the basics.

Ken Fracaro is a freelance writer in Hixson, Tenn. Additional writing by Stacie H. Whitacre, Editor.




POSTED ON: 3/1/2004