Funding a cleaning company whose contracts cancel on 30 days notice

Commercial cleaning runs on a spread that looks comfortable and a cash cycle that is not. You pay people weekly. You invoice monthly, in arrears. Your customer pays in 45 days. And the contract that justifies the whole arrangement can be cancelled for convenience on thirty days notice.

Every financing problem in the trade comes out of those four facts.

Now win a new 96,000-a-month contract. Direct labour on it runs about 55,680 a month. You staff it on the first of the month, invoice on the last day, and the customer pays 45 days later: cash arrives around day 75. That is 10.7 weeks of payroll — about 137,670 — paid out before the first dollar comes back. Winning work is the most expensive thing a cleaning company does.

Why the contract is not the collateral

Owners bring the signed contract to the meeting because it is the proof the business is real. A lender will read it and then ask about the invoices instead, for one reason: a termination-for-convenience clause with thirty days notice means the enforceable value of a twelve-month contract is one month of service. Everything beyond that is expectation.

This has three consequences.

What makes an invoice ineligible in this trade

• Disputed or short-paid amounts. A building manager who deducts for a missed clean creates dilution, and the facility measures it. Sustained dilution above the threshold cuts the advance rate on everything.
• Work billed in advance. Some contracts bill on the first for the month ahead. That is deferred revenue, not a receivable, and a careful funder will exclude it until the service period has run.
• Supplies and consumables billed separately. Often fine, but check whether the facility's definition of eligible receivable covers product sales as well as service.
• Anything past the ageing cut. Ninety days is common. Institutional and public-sector customers regularly go past it.
• Subcontracted work where your sub has lien or claim rights, or where the customer could pay the sub directly.

Ask for the ineligibles list before signing. The difference between a facility sized on 615,000 and one sized on 615,000 less a 40 per cent concentration excess is the difference between funding payroll and not.

The clause that makes assignment work

Cleaning contracts frequently prohibit assignment. Article 9 of the UCC makes anti-assignment terms ineffective as against a security interest in accounts in defined circumstances — see UCC 9-406 — which is why factoring in this trade functions at all. It does not make your customer happy about a notice of assignment arriving at their accounts payable desk, and in a business where the relationship with the facilities manager is the business, that matters. Ask the funder whether a non-notification factoring structure is available and what it costs.

Public-sector customers are a separate case. Claims against the federal government cannot be assigned except through the Assignment of Claims Act procedure, and many states and municipalities have their own rules. If a school district or a city building is your anchor account, get the assignment question answered before you sign a facility that assumes it.

The two costs that sit outside the funding line

What to do about the 75-day gap

1. Invoice more often. Semi-monthly invoicing on a 45-day payer moves your average collection forward by roughly a week across the whole book. It is free and it is the single largest improvement available to most operators.
2. Invoice on the last working day, not the fifth of the following month. Five days of delay on 410,000 of billings is five days of payroll.
3. Negotiate a mobilisation payment on new contracts. Supplies, equipment and the first period's deep clean are a legitimate one-off charge, and asking for it at contract is far easier than financing it.
4. Price the terms. A customer wanting 60-day terms is asking you to carry another half month of payroll. That belongs in the rate.
5. Match the product to the need. Factoring or an asset-based line against receivables fits a permanent, growing receivable. A fixed-term advance repaid over nine months does not, because the gap does not close in nine months — it grows every time you win work.

What to have ready

A customer-level ageing with actual days to pay. A contract schedule showing, for each customer, the monthly value, the notice period and the renewal date. Your dilution rate for twelve months. Payroll registers. The workers compensation policy and the last audit. A current debt schedule and a UCC search on your entity so that any old filing is cleared before it stalls onboarding.

Refuse a facility with a monthly minimum fee if your billings swing with contract wins and losses, and refuse one that treats a customer's routine 60-day payment as an ineligible without telling you the threshold in advance. Ask for the advance rate, the concentration cap, the ageing cut and the dilution threshold as four numbers in the term sheet. Those four numbers are your facility; the headline limit is not.