Small Business

Financing solutions: Crossing the cash chasm

Written by ProfitGuide Staff

Money for mega-contracts

Jill Anderson knows first-hand just how dangerous — and potentially fatal — a cash-flow crunch can be. Her firm, Aecometric Corp., which makes custom burners and other heavy industrial equipment, almost went broke during an economic slump that brought large-scale construction projects to a halt and dried up its order book. When clients started taking longer to pay, Aecometric (No. 73 on the 2008 PROFIT 100) missed payroll three consecutive times.

Amid the crushing stress of that early-1980s recession, Anderson’s husband Larry, who had been running the business, had a stroke. Jill took over, and has run the Richmond Hill, Ont.-based firm as its president ever since. To keep it afloat, she slashed its workforce from 22 to six and remortgaged the family farm. And she became ruthless about managing cash flow.

Today, Aecometric is thriving. Sales are up 820% over five years, to $22.8 million in 2007, and the run-up in energy prices has put its fuel-efficient designs in a sweet spot. But Anderson is still the cash-flow hawk the recession taught her to be: “I won’t take on a job unless I can see I have the cash to get from A to B and make payroll.” Her grasp of the importance of managing cash flow led her to a federal program that other entrepreneurs would do well to consider. The program lets Aecometric stay liquid while it’s waiting to get paid — and allows it to bid on much bigger projects than it could otherwise afford.

Keeping the cash flowing isn’t easy when your clients typically wait at least six months to pay all but a thin slice of the bill. “We’re lucky if we get 10% to 15% when we finish the [blueprints], and the rest is on an offer to ship,” says Anderson. Having to finance the vast majority of its jobs was an effective cap on Aecometric’s growth: “I had to turn down a $1-million contract because it would have taken six months and we wouldn’t have gotten most of that money until the end.”

The solution — appropriately for a firm that derives 95% of its revenue from exports — came in the form of bridge financing from Export Development Canada. For a specific export contract, EDC will provide the company’s lender with a loan guarantee for up to 75% of the firm’s costs for the project, including materials and labour. The program, which Aecometric has used for 12 years, is similar to a line of credit, but the cost is nominal. “I generally put 1% on my contracts to cover off the financing,” says Anderson. “When our receivables come in, the bank takes that amount off and we get the rest.”

The EDC itself admits that the Export Guarantee Program is “largely untapped.” That’s a shame, because it offers companies a way to take on massive projects that would otherwise be too expensive for them to carry. Thanks to the program, Aecometric was able to land a $3-million project two years ago and two $1-million-plus contracts in 2007. And last year, Anderson paid off the mortgage on the family farm in full. “It has made all the difference,” says Anderson of the federal agency’s financing help. “EDC is my hero.”

The simple science of quick collections

Jolera Inc. (No. 49) positions itself as a one-stop technology shop. That’s an appealing proposition for potential clients, but it brings with it a cash-flow challenge. Alex Shan, president of the Toronto-based outsourced IT services company, says that because Jolera routinely makes large-scale technology purchases for its clients, “we finance millions of dollars and take a hit on the interest.”

The firm manages this challenge by making a pitch to its customers: “We help you, so, in order to fulfill your requests, we need to make sure we get paid.”

The process begins as soon as Jolera submits an invoice. Its accounts-receivable department quickly calls the client’s accounts-payable department to confirm that the invoice has arrived, rather than risk finding out weeks later that it has fallen through the cracks. The call includes asking a simple yet powerful question: “Are there any problems with the invoice?” Solving minor issues with low-cost line items can reap big returns. “Sometimes a $10,000 invoice won’t get paid because of a $10 item,” says Shan. Fixing potential glitches like this can speed up payment by one to three weeks.

Another straightforward step is to find out the threshold amount at which paying invoices becomes more complicated, then keep individual bills below that. Many firms, for instance, send invoices above a certain amount to their board of directors for approval, even though the board meets only quarterly. “Breaking our billings down into small amounts increases the frequency of payments,” says Shan.

Jolera also builds first-name relationships between its accounts-receivable people and its clients’ accounts-payable staff. “It helps to get the ball rolling faster,” says Shan.

Together, these strategies have slashed the average time it takes Jolera to collect on accounts receivable from 90 to 45 days. As well as cutting interest costs, this healthier cash flow has made it easier for Jolera to continue on its internally financed high-growth path to 2007 revenue of $3.5 million, up 1,289% over five years. “Rather than having to wait several months for the money to trickle in to make an investment in our technology or organization,” says Shan, “it enables us to make it at the time it’s needed.”

How to turn debt into equity

The bigger MaxSys Staffing & Consulting gets, the more paycheques it writes. But almost all those cheques are to people working for other companies, not MaxSys, a provider of labour, clerical and professional staff for anywhere from a day to a year. The trouble with this is that while the Ottawa-based firm (No. 85) must pay those workers weekly, its clients take 30 to 60 days to pay for those labour costs plus a small markup. In fact, says MaxSys president Bryan Brulotte, a not-inconsiderable benefit of his firm’s service is that “we ease our customers’ cash flow.”

Of course, that transfers the cash-flow headaches to MaxSys. Brulotte’s solution: subordinated debt from the Business Development Bank of Canada (BDC). (It’s “subordinated” debt because, in the event of default, the BDC will rank behind the borrower’s bank and any other secured lenders.) One advantage of this is that the BDC offers greater flexibility than most lenders do. For instance, it might gear payments to your cash flow rather than requiring set amounts.

Brulotte says that besides giving MaxSys the cash it needs, BDC financing lets his company keep its key financial ratios healthy enough that its bank will lend money against its receivables. “For our bank, the BDC loans qualify as equity, so it doesn’t affect our debt-to-equity ratio.” That means MaxSys can, using its receivables as security, obtain a line of credit from its bank sufficient to send all those temporary staff their weekly cheques.

Has it paid off? Instead of being stalled in its tracks by financing constraints, MaxSys’s revenue reached $32.9 million in 2007, an increase of 700% since 2002. Brulotte says BDC financing has played a crucial role in permitting his company to grow this quickly. In the fall of 2006, for instance, MaxSys took on a $5-million contract to supply a client with 200 workers, a job that would have been too big without the BDC’s help. And Brulotte says this financing has also helped his firm remain consistently profitable throughout its rapid expansion.

Unlock the value of your hard assets

As a contractor, Pacific R.I.M. Services Ltd. (No. 151) would be in even greater peril than most companies would if it allowed itself to slide into a cash-flow crunch. That’s because it’s dependent on tradespeople, subcontractors and other suppliers to carry out the services that it provides to retail and restaurant chains such as Tim Hortons and Mark’s Work Wearhouse — everything from replacing light bulbs to making major renovations.

Fail to pay those suppliers on time and they won’t come to your next job. Even worse, says Dwayne Stewart, CEO of the Abbotsford, B.C.-based firm, you’ll have alienated a team that you selected in the first place because it had the best rates: “Now you’ve eliminated the low-cost guys, and you’re not competitive.”

Yet the payment processes of many of Pacific R.I.M.’s customers are so complex that it could easily run short of cash just when it needs to pay those suppliers. Although its contracts typically call for partial payment once a specified share of the work has been completed, several people must give their approval to making this payment. Then there’s a further delay before the person with signing authority gives the okay to actually cut the cheque. “You’re asking for the next payment even while you still haven’t got the previouspayment,” says Stewart. “We know we’re going to get paid, but we have to fight through the process.”

In order to make this fight less gruelling, Pacific R.I.M., like Jolera, has taken the time to become intimately familiar with its customers’ payment processes—even to the point of asking when the person who signs the cheques will be on vacation. By following the trail right to the person who puts the cheque in the envelope, Pacific R.I.M. can work backwards to figure out who it should invoice, and when, to ensure the necessary funds will be there to pay its suppliers on time.

Pacific R.I.M. also uses two other methods to manage its cash flow, both of them through its bank, HSBC. One is asset-based lending (ABL), which functions similar to a secured line of credit, with the security in this case provided by Stewart’s personal property. The interest rate, which he won’t disclose, is a negotiated amount above prime.

The company also uses factoring, a form of ABL in which the asset is accounts receivable. Again, the interest paid is at a negotiated rate above prime. Stewart says that although factoring is almost unheard of in the construction industry, his firm has been able to use it due to the quality of his accounts receivable and the flexibility of his bank.

The benefits have been huge. “Without factoring,” says Stewart, “we’d have to stretch other resources and use more costly methods, or ask trades to wait, which would affect our reputation and our ability to be competitive.” He also points to another compelling benefit: “I’m 36 years old, I have financial responsibility for 40 families and I help pay 40 mortgages. And I still sleep well.”

Originally appeared on