A service company needs a lot of working capital in order to operate efficiently. Meeting payroll is of course crucial, since your workers are your most important assets. They’re the ones providing the services in the first place.
Then you’ll need working capital for training your workers. They will need to replenish the supplies they use up, and often you will also need to rent or buy equipment so they can do their job. And not to mention, your entire enterprise needs an office, a website, and utilities.
So how can you get the working capital you need for all these expenses? This is a real problem, especially when your customers take more than a month to pay for the services you’ve provided.
Here are some of the usual methods:
- Borrow money from friends and family. This form of financing offers several advantages, including low interest rates and of course a speedier way of getting the money you need. But there are also disadvantages, especially if you have trouble repaying the loan – you risk damaging your personal relationships. Another disadvantage is that you may earn a reputation for “neediness” among your other friends and family, especially if your lender isn’t mindful of your need for confidentiality.
- Credit cards. If you can make the minimum payments on time and your expenses aren’t that big (especially when you are the sole service worker), then perhaps this is a viable option. It’s quick and easy and the minimum payments are not all that hard to make. But this also affects your credit, and if you suddenly find yourself unable to pay the minimum payments then the interest rate can be very damaging.
- Traditional bank loans. This is usually a good method to try if you have a good relationship with your bank. But the problem with bank loans is that the approval rate is basically 50/50, and the processing of the loan takes too much time. You’ll need to ask for the loan long before you really need the funding, or else it may come too late.
- If the fact that your customers don’t pay right away is giving you working capital problems, then this can be solved through factoring. This method of payment gives you an advance of up to 80% of the value of the invoices, and that money can serve as your working capital for future business. The rest of the money will come to you once your customer pays the factor in full, minus the fee of the factor.
The main advantage of this method of funding is speed. You can get approval quickly, the advance comes to you immediately. You can then use that money right away. But keep in mind that with the interest rates, you need a decent profit margin for this to work.
With small service companies, other methods of funding such as crowdfunding and selling a piece of the company to venture capitalists may not be practical. But what’s obvious is that you have lots of options aside from just a traditional bank loan. By learning how to get working capital for a service company, you can make sure you can provide service even when your customers take a while to pay you.