Using Financing in Disaster Restoration

Disaster restoration is a notoriously cash-poor business.  We typically pay our bills weekly – or bi-weekly for payroll, weekly or bi-weekly or monthly for our trades subcontractors and monthly for most vendors.  A well-run restoration company typically collects money in around 45 days with the average being more likely between 50 and 60 days. The difference between cash-in and cash-out looks to be about 30 days.  If this is the case in your business, then growing restoration companies need to have a cash solution.  

If you run primarily a mitigation company, then you may find the above numbers to be different. Many mitigation-only companies are able to create a cash positive business. For mitigation, the bills are often paid more promptly, and profit margins are high enough to cover the needed cash float. 

There are several options for managing cash float.  The first is the most challenging, which is to work with your vendors to get them to have flexibility in payments and extending payment terms to 45 days or more.  This can typically be arranged, however, my thought is that this typically will come at a cost of higher prices. You may be charged higher prices for the services and products that you use – or you have to purchase from subs and vendors that have the ability to lend you credit.  If you are able to pay your subcontractors within two weeks or less, you may find that your prices are lower and margins are therefore higher. Think about it, if these companies can float labor and materials for 30 days or more, then they either make more money or have the overhead that allows them to finance the business.  Either way, there is a cost to using your subs or vendors to finance your business. Some companies have built in capital through the ownership group or even wealthy friends or family. Either way this will come at a cost – often more than more traditional sources like a bank. People with money will require security – or will price the cost of their cash at a premium to offset the risk.  

The most common form of capital is a bank line of credit.  Companies often complain that it is difficult to obtain a line from a bank. It is important to understand that you should develop a relationship with a local bank prior to needing funds.  If you share your business story with a banker and then prove to them over time that you and your business is a good risk, then they are more likely to lend you money. One important step is to develop a great financial reporting system.  You need to have accurate and timely financial statements – and more importantly understand them! You may have a great relationship with your business banker – but they have to answer to the board and the auditors. It has to be clear that your business will be able to repay any and all loans.  After you have your financial house in order, set up an appointment with your banker to review your business plan (does not need to be a formal plan – but needs to be clear and articulate.) At first you may be offered a relatively small loan to gain experience with your business. If you are able to receive funds, then use them to help your cash float and perhaps even to lower your subcontractor payments or even take material discounts where offered.  Practice using the loan and then fully paying off every 6 months. My recommendation is that you ultimately work your way up to obtaining a line of credit of up to 10% of your annual revenue that is secured by 80% of your under 90 day accounts receivable. If you have this line established, then you should be able to take advantage of any discounts as well as potentially asking for a prompt pay discount to those that will offer. The availability of a line of credit will help you take some of the pressure from immediate collections out of your business and allow you to focus on some of the other business priorities. 

In the event that you are able to obtain an operating line, make sure that you have discipline in the use of the funds.  Don’t use your line to purchase assets, as asset loans as much easier to get and serve a different function in your business.  Also, you should not use your asset loans to float cash since the repayment expectations are different. If you plan on buying assets (vehicles or equipment) then you can put together a secured loan or lease that will help you cover these costs. 

Be careful that you don’t use your line to finance business losses.  This could get your business into trouble as you will not have the needed future income to make payments and if you are using your accounts receivable as collateral then the maximum line may diminish as your losses mount.  This could result in the unfortunate situation where you loan is called by the bank. I have spoken to business owners that are operating near breakeven revenue and they are thinking that getting a line of credit will relieve pressure and allow them to grow their business.  I advise these businesses to push to consistent profitability prior to undertaking any debt. When you insert debt into a breakeven or losing situation it can create a downward spiral that is near impossible to escape. Your line is to finance profits and float your cash so you can take advantage of opportunities and improve your margins.  You will have to learn other ways to accomplish this if you are struggling with profitability. 

One final recommendation is that you maintain a focus on collection systems and collection discipline.  A line of credit will make running your business easier if you develop systems and procedures that are consistently followed.  I have seen companies that stopped monitoring collections because they have a solid bank line of credit. When they took their eyes of collections, they found that they days outstanding slipped and they were at the top of their credit line before they knew it.  

Banking lines are helpful when used properly.  If you are able to develop a working relationship with your bank then make sure that you have an equal focus on the basic processes in your business.  You should have timely and accurate financial reports that you are closely monitoring. Be able to predict future cash flows into and out of your business and be very responsive to changing situations.  If you would like help developing your business cash management, banking relationships, or management situations, then contact Business Mentors today!