Finding the Money: A Guide to Financing for Growth for Commercial Cleaning Companies
Starting a commercial cleaning business is scary, but the cash requirements are relatively small compared to many industries. Those on a tight budget typically buy only what they need as they need it. During a scaling-up period, however, cash needs seem to explode overnight so financing for growth may be necessary.
Hiring new staff, moving to a larger office space, getting new equipment—it all all comes at a steep cost, and it's all necessary for successfully growing. And it's enough to have you shouting “show me the money!” like Rod Tidwell in Jerry Maguire.
The increased need for cash brings with it a big potential for disaster. In fact, the most dangerous time for a company is not at the start but during growth. That's why it's important to plan for the financial side of growing, even before you need the money.
Tips for Financing for Growth
To Bootstrap or Not
For some BSCs, the best way to build a company is bootstrapping. That means handling the finances internally, without taking money from outside parties. It's a slow and difficult road, but can be worth the struggle.
Pros: Bootstrapping allows owners to maintain the greatest amount of control over their companies. With no investors to satisfy, a BSC's vision for the company is never compromised. Plus, with no debt to repay, there is less pressure to grow quickly.
Cons: Without the sudden injection of cash that a third party can provide, BSCs must prioritize investments. It involves pinching pennies, spending wisely, and doing more with less. It also means growth will be slower going.
To decide whether bootstrapping is right for your growth, you'll need to decide which is more important—maintaining complete control and not taking on debt or scaling at a more rapid pace without having to fret over every penny spent.
To learn more about bootstrapping, click here.
Debt Financing
In an ideal world, every BSC would have enough cash in the bank to make ends meet and fund growth. For most commercial cleaning businesses, however, that's simply not realistic. When cash flow is tight, you may need to seek outside financing to help you expand into new markets, new verticals, or new services.
For that, BSCs have several options but most experts recommend debt financing. That includes lines of credit, bank loans, credit cards, or private loans from agencies like the Small Business Administration.
This type of financing is typically secured by company assets (such as a mortgage on a building). The debt is paid off over a fixed time frame with interest.
Pros: This type of financing allows nearly immediate access to cash for growth. BSCs retain complete control of their business, interest rates are typically competitive, and the principal and interest payments on a business loan can often be deducted at tax time.
Cons: This type of financing affects your credit rating and may result in higher interest rates on later loans. Also, lenders demand installment payments on a loan soon after it's given, so a BSC will need to quickly begin making money from scaling efforts. A business that defaults may lose its collateral and you're still obligated to make your payments to the lender even if your business fails.
Before choosing debt financing, it's important to research lenders and compare rates and fees. Also, you'll want to ask about lending minimums and how long the funding process takes.
Other Options
Although far less common than bootstrapping or debt financing, there are a few other options available to BSCs looking for help growing their businesses.
Accounts receivable (AR) factoring (or invoice factoring) may be an option if you have government or commercial clients that have excellent credit but take too long to pay. Basically, you sell your outstanding AR to a specialized financing or factoring company at a discount. The third party assumes the risk on the invoices and, in return, delivers a quick influx of cash into your business.
On the upside, you get immediate funding and can stop spending time pursuing customers for payments. On the downside, you don't get the full value of your contracts; most factoring companies take 10-25%.
Recapitalization is another form of equity investment. A BSC sells a portion of the company to a partner. The BSC receives that portion in cash at closing, but keeps minority equity ownership and continued responsibility for running the company. This is different from an outright sale, where the owner receives the entire cash value but zero ownership and involvement. The financial partner in this situation can be an individual or an institution, but typically it's the latter.
This type of transaction provides cash without debt. While the BSC loses controlling ownership, he typically retains oversight of day-to-day operations. It's only an option, however, for profitable contracting cleaning firms with a clear path for growth.
Equity capital is when a private individual (angel investor) or a company/fund (venture capitalist) invests in a company in exchange for an ownership stake. If the company fails, the equity is lost and the investor loses. That equates to a high level of risk, which means these investors look for greater returns and demand more control than banks.
This type of financing is uncommon in the contract cleaning business, but can be useful for very large companies looking to fund major growth.
Grants for BSCs do exist, but are not easy to get. To search for this type of funding, check the Catalog of Federal Domestic Assistance (CFDA), which is a full listing of federal programs available to all institutions, including private corporations and individuals. Another good resource is www.grants.gov, and states also offer grant money (read about it here).
These funds don't require repayment, but require many hours to find and apply for. Plus, it can take up to a year to get the money. If you're prepared for the work and wait, however, a grant can be a great option for individuals and businesses that qualify.
The pitch
Unless you're bootstrapping, financing your growth requires some homework. Whether you're pitching to a bank, an equity firm, or the government, be prepared to turn over a lot of documentation about your business.
The exact paperwork required will differ depending on the institution, but most likely you'll need to share a business plan, financial projections, tax returns, balance sheets, credit score, and more. The goal is to show you know your industry, are at a distinct competitive advantage, and have a clear opportunity for growth.
This can be an arduous process for small BSCs who rely on accounting software and filing cabinets. Larger BSCs often hire outside firms to handle all the documentation necessary to secure financing.
Ebook Download: Make Your Contract Cleaning Business Stand Out From the Crowd
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Competition is a fact of life for every business, but especially for building service contractors (BSCs). What sets your cleaning company apart from all the others knocking on a prospect's door? How do you convince them to choose you? And how do you ensure your current customers will stay with you? To survive in a crowded marketplace, you must differentiate yourself from every other BSC out there – you must make your contract cleaning business stand out from the crowd. This guide will show you how. |
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