How do lenders size a line of credit for a security guard company?

The gap between the shift and the payment

A contract guard company sells hours at posts: a lobby desk around the clock, a patrol route overnight, a construction site on weekends. Officers are paid weekly or every two weeks. Customers are billed weekly, twice a month or monthly for the hours worked, and then pay on their own terms. The company funds every hour between the shift and the collection.

What makes guard companies different from other labor businesses is how little room there is in each hour. The bill rate has to cover the officer's wage, payroll taxes, workers' compensation, general liability insurance, uniforms, licensing and training, supervision and the dispatch or scheduling system, and leave a margin. When that margin is thin, small leaks in the schedule decide whether the contract makes money, and lenders know it.

A line of credit fits this business well when it carries receivables and nothing else. It fits badly when it absorbs losses on underpriced contracts, because the borrowing base grows with billing whether or not the billing is profitable. For the general method, see how lenders size a working capital line.

Overtime and holiday hours: where the margin goes

Most guard contracts bill a fixed hourly rate per post. The company's cost for that hour is not fixed. When an officer calls out and a colleague covers the shift on top of a full week, the company pays overtime; on holidays it may pay a premium; and unless the contract says so, the customer pays the ordinary rate for both. The table shows what that does to one hour of a post.

Two overtime hours can erase the margin on several regular ones. A company with high turnover, thin scheduling benches or posts that are hard to staff runs more overtime, and its gross margin falls even as revenue holds. Lenders ask for overtime as a share of hours by month and for gross margin by contract. They are not trying to run the schedule; they want to see that the owner watches the same numbers.

Contracts that bill customer-requested extra coverage at a premium, and that allow holiday billing, are worth more to a lender than the same revenue at a flat rate.

Contract terms, rebids and the loss of a large account

Guard contracts are awarded for a term, often with renewal options, and many are rebid at the end of it. Most can be terminated by the customer on short notice. That makes the contract schedule the second document every lender asks for, after the aging. A useful schedule has, for each contract:

Losing a large contract shrinks receivables within a billing cycle or two. The line shrinks with them, which is manageable; what hurts is that officers, supervisors and overhead do not shrink as quickly. Lenders will ask what happened the last time a major account left and how quickly costs followed. A company that has won and lost rebids and kept its margin tells a better story than one that has never been tested.

Wage increases are the other contract risk. Where local minimum wages or client-mandated rates rise each year, a contract with no pass-through loses margin every year it runs. A book full of such contracts can look healthy on revenue and still be sliding on gross profit.

Government and institutional customers

Public customers pay reliably but on their own schedule, and they come with rules. Federal contracts can be pledged to a lender only through a formal assignment of the contract's payments, acknowledged by the contracting office; without it, many lenders treat federal receivables as ineligible. State and local agencies have their own procedures, and payment can slow around the end of a fiscal year. See eligible vs ineligible receivables for the general treatment.

Government service contracts also commonly set minimum wages and benefits for officers. Underpaying them, even through a payroll setup error, creates a back-pay liability that a lender will reserve for once it knows. Where the company is a subcontractor to a prime contractor, pay-when-paid terms can make its invoices conditional, and conditional invoices may be excluded from the borrowing base. The broader case of public-sector receivables is covered in lines of credit for government contractors.

What counts in the borrowing base

The eligible pool is invoices for hours worked, supported by time records, within 90 days of invoice date. The usual cuts apply: invoices past 90 days, the excess over the concentration limit for any one customer, and all of a customer's invoices under the cross-aging rule if too much of its balance is past due. Hours worked but not yet billed are usually excluded.

Guard companies have a particular form of dilution: credits for missed or short-staffed posts, penalties under performance clauses, and disputed hours. Clean electronic records, from time clocks, guard tour systems and post logs, keep disputes down and let a field exam tie invoices to shifts quickly.

Concentration is common because one hospital system, property manager or campus can account for a large share of hours. With 2,000 of eligible receivables and one customer owing 700, a cap of 20% lets that customer count for 400; eligible receivables fall to 1,700, and at an advance of 85% the company can borrow about 1,445 instead of 1,700. Negotiating a higher cap for a strong customer is easier at the start than later.

Licensing, insurance and payroll taxes

A lender lending against a guard company's receivables is relying on the company being allowed to keep working. That means current state licenses for the company and its officers, including armed-officer permits where they apply. A lapsed license can give a customer grounds to terminate the contract, and the receivables behind the line go with it.

Insurance is a large cost and a real risk. General liability and workers' compensation premiums are audited against actual payroll, so a year of growth can bring a large true-up. Armed posts, high-risk sites and a heavy claims history raise premiums, and some customers require coverage levels a smaller company struggles to carry. Lenders ask for certificates, the loss history and any open claims.

Payroll taxes come first of all. Unpaid trust-fund taxes can become a federal tax lien that competes with the lender for the receivables. Lenders ask for filings and proof of deposits, and reserve for or decline anything in arrears. Owners in that position should read refinancing with unpaid payroll taxes.

Covenants, reporting and what trips guard companies up

Reporting follows the collateral: a borrowing base certificate weekly or monthly, an aging by customer, monthly financial statements, collections into a lender-controlled account on asset-based lines, and a fixed charge coverage covenant tested at all times or only when availability runs low. Transparent's lender book includes 235 lenders that write asset-based loans and lines and 116 that write factoring; smaller guard companies often start with factoring and move to a line as their records and size allow.

• Winning a big contract. Hiring, licensing, training and uniforming officers happens before the first shift, and the first payrolls come before the first invoice is collected.
• Overtime creep. Turnover and thin benches push overtime up and margin down, often unnoticed until the year-end statements.
• Contracts without wage pass-through in markets where wages rise every year.
• Officers paid as contractors. A classification problem is a payroll tax and wage problem a lender will find.
• Merchant cash advances. Daily payments and liens on the receivables a line needs; see refinancing cash advances for security companies.
• Event and special-duty work that is lumpy and billed one-off, which inflates a good month and hides a weak base.

Preparing the file

From Transparent's line-of-credit checklist: an AR aging by customer with days outstanding; an AP aging; the balance sheet and P&L; a year-to-date P&L through last month-end; a debt schedule showing existing liens and UCC filings; and, where available, bank statements and two to three years of business tax returns. For a guard company, add the contract schedule described above, overtime by month, gross margin by contract, license and insurance certificates with the loss history, and payroll tax filings with proof of deposit.

Once the documents are in, Transparent builds the full lender package — financing model, lender presentation, blind teaser and underwriting memo — in a day, and charges nothing before a loan closes. The SBA's lending record in the industry is on the security guards and patrol services data page.