There is that vicious and endless cycle whereby you need money to hire employees and pay their salary but you need the work to feed them and your business. Sometimes you can't get the work without having the employees in place. Is the best way to break the chain taking a loan (as well as a risk that having the employees won't call forth the work)? Perhaps it's most strategic to first take a smaller financial risk hiring one very strong salesperson who solicits projects that feed the business. Does anyone have experience with this problem, perhaps specifically in the creative and digital agency sphere?
Though I don't have experience in that particular market sector - I DO have experience dealing with that challenge.
Every dollar you borrow increases your risk exposure so you have to factor that into your ROI. Pay careful attention to the terms of the loan (or LOC) and if at all possible your business should be the guarantor (versus you personally taking on that role).
That said - Here are my brief thoughts:
1. Unless you need a lump sum - go with a line of credit versus a loan.
2. Consider hiring someone to do contract work versus bringing on a salaried employee.
3. Unless you already have adequate work for them (i.e. their efforts will be profitable) don't bring employees on. (I mention this because you state that "you need the work to feed them" - suggesting that you might be bringing them on FIRST... before there's a need).
4. In many markets - salespeople work on commission. Perhaps you can find someone that will work for 100% commission thereby eliminating your need for a loan to give them a paycheck.
Harsh Statement Warning... (don't read on if you are easily offended): The truth is that If you are currently unable to generate sufficient business (i.e. you need someone to do that for you) then you don't yet have a "business".
Note that I define a business as an entity that has discovered and successfully implemented a viable business model (and is therefore profitable) and fulfills the criteria of being both repeatable and scalable to the extent required by the owner to be worth moving forward with.
If you'd like a more detailed explanation and help deciding next steps, you know how to reach me.
Best of luck to you!
I went through this when I started Spheric Technologies at 24 years old. I did save $70K to start, but quickly ran out of money after hiring 3 people (cashflow almost killed me). The company grew 150% year over year to 30 employees and was acquired in May of 2008.
How I solved the cash problem for hiring ... a few things.
1) Dynamic pricing. When a customer asked me the cost for a project or our rates, I always said it was contingent on the payment terms they could accept - 50% up front, Net 0, Wiretransfer for payments was 20% less then Invoice 30 days, Net 30, cheque in the mail. Here's the trick though - ask them first what they're willing to do for payment terms, THEN use the items above to negotiate :)
2) Hire a recruiting firm that can get you amazing talent at the price you need within 2 weeks - and negotiate paying them 3+ months out. That way, you can pre-sell the work, and feel confident you'll have someone solid to work on the project when it starts (2 weeks isn't un-reasonable to wait.) I set this up 9 months into the company, and it's what allowed me to grow so fast, and ensure we always delivered on the promise to our customers. That partner exists, find him.
Those 2 things 1) Customer Financing, 2) JIT Talent Pipleline can transform your business.
Hope that helps - feel free to request a call anytime to discuss the details.
I've most definitely experienced this issue first hand a few times, and I struggled to find an answer. I finally did get a sense of how to tackle this by going out and meeting with founders of engineering and other professional service firms. The product is quite different (not to mention billable rates...) however, the model is very much the same.
I would always avoid taking financial risk to fund growth, unless you have a contract in the pipe to cover the salaries, overhead and even the profit margin all lined up, in which you really really need to hire correctly and be seriously organized.
As a rule of thumb, every billable resource has be billing at 85% of their work day, everyday. This is incredibly hard to achieve when setting up your agency, as there are countless processes that need to go in place to achieve this. Your first 5 or so hires all need to be billing at 85% before you start taking on overhead staff. Taking on overhead staff too early WILL limit your ability to scale.
If you have a team all billing appropriately , it becomes quite easy just to have two staff working the extra 15-20 hours per week to cover the additional outputs you require. Only make the hire once you have the business in place, solid internal processes figured out ahead of time and have gone through a billing cycle or two so the additional salary won't eat up your cash flow.
It really all comes down to getting your model down to an art. It is more often far easier to work with what you have to become more profitable than to scale. And if you are looking to scale before you have at least 3 months cash in the bank, I'd be very cautious about growth.
This was the stuff I never wanted to hear, but really really needed to hear.
Also, if we are talking about your first hire, first look at ways to offload a lot of your overhead time suckers. (Invoicing, book keeping). If you are billing enough and charging a fair rate, it won't be long before you have the cash in the bank to handle the risk. If not, you are leaking money somewhere. Find the hole and plug it, fast. Before you make your first hire, I recommend reading "The E myth". This will help prepare you to ward off some of the perils of your first hire.