I get a lot of questions about the finance and the funding required to grow an inbound agency. I especially like getting the opportunity to answer questions like this on the blog.
I want to preface that banking, finance and business funding are not my areas of expertise. If you want your business to grow with marketing and sales—I’m your guy.
When it comes to finance I would quickly point you to other experts. But having operated a profitable inbound agency for over 13 years, I’m obviously doing something right and I’m happy to share what I do know about this topic.
Growing an agency requires a lot of moving parts. You need organic growth, meaning you need to be adding new clients to the agency and the revenue from those new clients. You need to be retaining current clients and getting those current clients to increase their engagements with you. There’s nothing more frustrating than adding one new client and losing one existing client every single month. It’s like trying to fill up a bucket with a hole in it.
Policies And Procedures Might Limit Your Need For Financing
Agencies need people, people are expensive. You need the financing and cash flow to afford those people but you also need the systems and processes in place to allow you to self-finance as much as possible. For instance, what are your payment terms? If you’re sending your client a bill at the end of the month and then waiting 30 days to get paid (assuming they pay you immediately) means you have to float the expenses of the agency for 60 days. Ouch!
You should get paid upfront. Give your clients their bill upfront. We send clients 12 invoices when we start the engagement, one for each month and expect the money to be in our hands on the first of the month. We give them a five-day grace period, but then if we’re not paid, we don’t work. We won’t start an engagement without that first check. So if and when you need to hire people because you just got a lot of new client work, you should have the funds to pay for those people. This simple adjustment might help limit the amount of outside financing you need.
If you want to grow dramatically, it might not be enough to have regular cash flow fund your hiring or expansion plans. When that’s the case, I like to look at options from a risk and reward perspective. Every option has pluses and minuses and deciding on which one is right often has to do with your tolerance for risk.
If your agency needs more cash to pick up the pace one option is for you to invest your own money. This can be done by writing a check to your agency or it can be done by not taking a check. But not getting paid because you can’t afford to pay yourself is not making a personal investment, it’s covering up much bigger issues. If your cost structure doesn’t allow you to pay yourself a going rate for a CEO, you need to look more closely at the financial structure within your agency.
There’s nothing wrong with bank debt. I consider this a very low risk option and one that has a high return. A line of credit is a great option and banks are more frequently providing this to agencies who have a history of even modest financial performance. This provides a lot of flexibility. As an example, we had a large line of credit with our bank that we never needed. It was there in the case of an emergency.
You can pull down as you need, pay back when you can and as long as you keep an eye on it and manage it proactively, it also creates a very nice relationship and payment track record with your bank. The best time to set this up is when you don’t need it. When your agency is doing well, that’s when you go to the bank. If you wait until you’re in trouble, you might not get it.
Be honest with your bank. Once you start down this line with a bank, make sure you have a good working relationship the people at the bank. Be proactive with them. Meet with them regularly and let them know what’s going on in your business. Don’t let things become an emergency and then reach out to them, keep them in the loop when things are good and when they’re not so good.
There are other ways to finance your growth besides the bank. One is outside investors. People who have money and want to give it to you to own a part of your business. People who have money who want to give it to you to help you grow. Both types of outside investors are fine but if we look at these from the risk and reward perspective this type clearly comes with more risk.
Outside investor almost always come with a set of requirements. Even angel investors, friends or family tend to put pressure on the business owner. Some of it might be unintentional, some of it might be strategic but when money is involved using friends and family is higher risk—in my opinion.
Taking outside investment from strategic business people, venture capital, or other similar sources almost always comes along with oversight, input and an expectation that you’ll listen and almost always act on their input. In essence, your business is no longer yours. So the risk here is very significant. Part of why you probably started your company is to be your own boss and follow your own plan. Even the most placid outside investors make this more challenging.
Creative Funding Sources
Today there are a lot of less traditional sources. Crowd sourcing, HubSpot’s loan program and other creative funding options make getting the money you need to grow your company much more accessible. Simply apply the same risk and reward thinking and you’ll likely make the right choice for you.
HubSpot is willing to loan you up to $300,000 to help you grow. I believe you have to be a certain tier level to qualify for this program but it’s extremely low risk. If you don’t pay it back, they hold your commissions until you’re all paid up. They’re not interested in telling you want to do or owning any part of your company. I also have no insight into how successful this program has been for them. But it’s definitely creative.
When it comes down to it, you should pursue all of the available sources of funding and then decide which ones or one fit your risk profile. Now you have all the options on the table and you get to pick and choose when and if you want to execute any of them. So much about business is giving yourself options. The more options you have the better.
Start Today Tip – The best advice I can give you is don’t wait for an emergency to have funding in place. Skipping a paycheck is not a financing strategy, it’s desperation. It’s also not a badge of honor, it’s not entrepreneurial to not get paid, it’s bad planning and poor financial management. You should probably have enough cash on hand to cover all your costs including payroll for two months. If you don’t have that then you need to look at your finances, costs, controls and other key levers. Better yet, having a line of credit in place, or having funding sources lined up is just good business. All you need to decide is what’s your risk tolerance and then proceed accordingly.
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