Getting the first large order as you’re growing your business, or beginning to scale production as you have multiple coming in, is easy when you have a plan for both financing and for operations. The most important part is matching financing to the order stage and planning for issues that could block delivery.
Matching financing to order stage means knowing how money comes into and goes out of the business and what funding types fit any cash shortfall. This helps business owners to choose options like purchase order financing when they need fast approvals or SBA loans like CAPLines for more workers, and 504 loans for new warehouses later in the order process.
The four steps in this guide will help you have a process and financial strategy in place to prevent obstacles as you begin increasing production and capabilities.
Step 1: Forecast Cash Flow Through Order Stages
Forecasting cash flow across different stages of the order helps you determine whether you need additional financing and the type of funding that works best. List out all the costs you have by stage of the order including:
- Direct costs like raw materials, shipping, insurance, and packaging.
- Temporary costs like part-time labor, additional warehouse space, and higher utility bills.
- Required investments including new permanent hires, machines or equipment, and new or upgraded space needed to deliver the order on time.
- Contingency buffers that cover a worst-case price increase, emergency shipping, or major maintenance needs.
Now list the expenses on a spreadsheet, breaking down the timeline to the day if possible. Then add expected cash inflows including:
- Customer advances or deposits.
- Progress or milestone payments.
- Invoice payments.
- Free cash flow from the day-to-day business.
Last, subtract the expenses from the incoming cash flows to get a day-by-day / week-by-week cash flow excess or gap. This cash flow gap analysis helps you choose whether to cover shortfalls from personal funds like a HELOC or IRA loan, or to seek business financing. Once you’re ready, here’s how to match the right financing type to your cash flow gap if you are not funding it through personal assets.
Step 2: Match the Financing to Your Need
Your financing choice should match the problem you’re trying to solve. Using a line of credit (LOC) for small cash flow gaps makes sense. It gets you cash immediately and won’t exceed credit limits. Equipment financing loans are best when you need new machines to deliver the order since they have built in collateral to help secure the loan.
Most important is the speed at which you need the financing and the amount required. Traditional loan types take longer to underwrite, while options like PO financing and revenue-based funding are generally quick.
Here are financing types that may work for you in the early and middle stages of the process.
Early-Stage Financing Options
- Purchase Order (PO) Financing is where lenders give you the money needed for materials and services needed to fulfill your order and then get paid back when your customer pays. PO financing is good for early expenses like buying raw materials. Approvals are faster than traditional loans because having the order reduces risk, and some companies offer PO funding when banks won’t provide a loan.
- Equipment financing funds new machines, vehicles, and other capital expenses needed to increase your capacity or delivery speed. Lenders use the equipment you’re buying as collateral to make approvals easier if you don’t have other business collateral or personal assets.
- Inventory financing uses the inventory itself as collateral, has a relatively easy process compared to unsecured loans, and your payback period will be shorter than long-term loans as you should be able to sell the inventory quickly and have the money to pay it off.
- Revenue-based financing provides a lump sum of cash in exchange for a percentage of future sales. Approvals are fast when you have a strong sales history, and repayment is based on future sales as a fixed percentage.
- Business lines of credit offer quick access to cash. If you have an existing line open, you can cover anything up to your available credit limit (like machine repairs and short-term expenses). But watch out for variable rate changes while you have an outstanding balance, as higher rates can make the LOC more expensive.
Mid- to Late-Stage Funding Options
- Invoice factoring lets you sell uncollected customer invoices to a third party (factoring company) where you get a lump sum of cash and the factoring company collects from your customer.
- Working capital loans cover most operating expenses including temporary labor, salaries for new hires, materials, rent, increased utilities, or any other costs needed to fund large orders. Some may have higher interest rates and shorter payback periods than traditional small business loans, but the short payback period means the total interest you pay will be lower than on most longer-term business loans.
Pro-tip: Try to negotiate a balloon payment clause and no curtailment (prepayment) penalty clause into a business loan agreement. This can help you save on interest expenses by paying the balance ahead of schedule.
Now that you have a financial plan to match business needs at each stage of the order, the next step is to lock down the operations and contingency plan.
Step 3: Create an Operational Contingency Plan
An operational contingency plan makes sure you don’t get derailed by unexpected issues at single points of failure by addressing operational weak points in advance. Your plan should cover three primary areas:
- People
- Equipment & maintenance
- Vendors and supply chain
A few key people are likely the make-or-break positions in your entire order process and losing one to the flu for a week can put large orders at risk. Prepare for this in advance by writing down their operating procedures with task-level detail. Even simple things like knowing who to call when the air conditioning goes out saves time.
When you have procedures documented, cross train at least one other employee on the key position. That way, if the first person gets sick, you have someone who knows what to do or where to look.
If you may need temp workers, vet different staffing firms and get contracts in place, so you have agreed-upon costs, processes, and ideal candidate profiles for each position. This way, you can tell the staffing firm to start sending you resumes without a time-consuming onboarding process.
Equipment causes problems when you hit capacity and won’t get the order done in time without pushing out other orders, or because of maintenance issues you didn’t expect. A standard preventive and routine maintenance plan with specific people accountable for executing and verifying the maintenance is a must. But don’t base the full plan on your historical production because your machines might behave differently with higher volumes.
Talk to the equipment manufacturer about how you should adjust maintenance schedules based on new conditions, higher volumes, less downtime, and other changes due to your large order. Vehicles are a good example where the manufacturer might recommend oil changes every 8,000 miles in standard conditions, but if you’re running trucks 24/7, they’ll need oil changes more often.
For emergency maintenance you can’t handle in-house, get a contract in place with service level agreements and put a response timeline into the contract. Also, find two places nearby where you can rent replacement equipment in case the maintenance team can’t get things back online.
Contingency planning for your supply chain should be another focus where you should review and update contracts with existing vendors. Make sure you have specific, time-bound deliverables in your contracts so that the supplier will deliver or compensate you in some way. Also, have backup suppliers and tentative contracts in place so you can move quickly if you need to make a supplier switch mid order.
With financing and contingency plans in place, the final step is disciplined execution and proactive communication.
Step 4: Strict Execution and Communication
Until the team has their new production at a comfortable level, be stricter about execution and communicating with customers and your suppliers. Large orders require more focus, and things can get lost in translation or slip through the cracks more easily.
Team Communications and Tracking
Tell your team and suppliers in advance that you will be more actively involved, asking more questions, and double checking more details. Most importantly, be clear this isn’t micro-management but it is to help you keep up to speed on operations so you can learn where pain points are and either hire more staff, get better equipment, or create better processes that will make their lives easier.
Visual overviews of the entire project flow and dependencies across teams make it easier to see a problem in advance compared to having a long task list on a piece of paper. If you’re comfortable with software, project management tools track tasks and dependencies and show you how the order moves through your organization in real time. If you don’t like software programs, you can always use a large wall in your office with notes, strings, and push pins to show important task dependencies.
Client Communications
Proactive communication with the client via their preferred channel is also important. Some companies appreciate constant updates about where the order is in the process, even seeing pictures as the order comes together. Other clients don’t want to hear from you until the day of delivery because they only want to know that their order is on time and on budget. Ask them how they want you to communicate with them, and how often, to build rapport.
If you’re establishing a new relationship, you can tell them about what has worked for you and previous clients in the past to set a foundation for communication. Then ask them if they want you to change that process so it’s unique to them, and if so, what changes they’d like to see. This shows that you’re an expert with other large clients, but willing to create something special for them.
By planning your company growth through larger customer orders ahead of time, you can prevent some unforeseen obstacles from happening and be prepared to tackle expected ones involving machinery, staffing, and financial needs.
SmallBusinessLoans does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only. You should consult your own tax, legal and accounting advisors.
