Frontloading

The recent discussion about running a business on credit produced some interesting responses. It’s clear that a line of credit is useful and, in some instances, essential.

But that does not mean you have to go to the bank for the money.

Sometimes, the best source of financing is your customers. I have always tried to operate on my customer’s money, not my own. That means securing a deposit that is sufficient to move the project to a point where another draw is justified.

In an ideal world, this is easy. But things happen and, not infrequently, there is a shortfall. This usually comes near the end of the job when most of the available funds have been exhausted.

This is where frontloading comes in. Frontloading can also be described as “robbing Peter to pay Paul.” You sell another job and use the deposit from that job to finance the completion of the previous one. Of course, you end up behind but it’s really not that different than borrowing from a bank.

I have always considered frontloading to be a perfectly viable tactic. And for the most part, it works. The system crashes only when you have no new job to draw on. But in that case, you wouldn’t be able to pay the bank back either!

D.D.

COMMENTS

  1. Carl Evans wrote:

    David, I operate in the same way especially since our last downturn. I wholly believe in no debt if possible.

  2. Doug Joseph wrote:

    Really enjoy reading your blog, it’s nice to know there are others
    dealing with the same problems I am.
    Doug

  3. Rich wrote:

    David,
    The trouble with Frontloading scenario is that you’re too honest. There are some that frontload for profit and abscond with the upfront fees.

    In California, deposits are limited to 10% of the total estimate or $1000 which ever is less.

    For honest contractors the California system hurts but we all know that there are always a few bad apples that spoil the barrel for everyone.

  4. Dan Cada wrote:

    I have avoided “frontloading for the very reason stated. Recent gaps in workload in a slow economy make it’s failure likely. I prefer to get a deposit that would cover all cost of materials anticipated in completion. Then if a client backs away,only my labor costs are at risk, but I’m a mostly one-man shop so worker’s salaries aren’t a concern.

  5. Alan Blough wrote:

    Talk to Ken Peterson of the SEN Design Group; the scenario you describe is the reason so many shops fail. They are constantly chasing money and not really making a profit.

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