Asked to fund payroll for a cold calling shop against client receivables

$8,000 cushion on $61,000 revenue is 13 percent, and that's before anything breaks. Lose the top client and he's under water the same month. The personal guarantee is the only real security in the file and its value is whatever he owns outside the business, which you didn't mention.

Run the loss case properly. Top client is 44 percent of $61,000 across two accounts, so say the larger single one is 26 percent, $15,900. Gone on 30 days notice. He can't shed payroll at the same speed because the callers assigned to that account are on the floor and he'll try to hold them for two weeks hoping to replace the client. So month one after loss: revenue $45,100, costs unchanged at $53,000 excluding his draw, he's down $7,900 and his draw goes to zero. Month two he cuts three seats, saves maybe $11,000, gets back to roughly breakeven at 6 seats.

So the shape of the risk is a two month hole of about $12,000 to $15,000, drawn on your facility, with the collateral shrinking at the same time. Your borrowing base exclusions help but they trigger after the fact. What I'd want is a covenant that a drawn balance over some level requires him to stop taking a draw.

@ledger's two month hole matches what I've watched happen. I've been on the client side of two of these shops and both times the shop lost a big client and immediately got worse at serving me, because the good callers got moved to the new business hunt. That's how the second client leaves. Concentration risk in this business compounds through service quality.

Naive question, why is he borrowing at 24 percent a year instead of just telling the two slow clients to pay on receipt or prepay the month? Investors buying leads have cash if they're buying houses.

@rigging that was my thought too. Prepaid monthly retainers would fix the whole timing problem without a lender in it. The fact that he isn't asking his clients for that is information about how much bargaining power he has.

Read the client agreements, all seven, before you decide anything. I'd want to know whether the retainers are cancelable at will, whether there's any minimum term, and specifically whether the client or the service carries the compliance obligation for scrubbing and consent. That allocation clause is the one that decides who gets named if there's ever an enforcement problem, and how a given statute applies to an outbound calling arrangement is a question for a telemarketing compliance attorney in the relevant state rather than something you infer from the contract yourself. If his agreements put that risk on him with no cap, your borrower has an open ended exposure sitting outside the financials you were handed.

Also get the actual third party scrub invoices, not a description of the process. A vendor relationship that exists shows up as monthly billing.

$19,000 over 60 days out of $61,000 monthly is 31 percent of a month's revenue already stuck. "A conversation we're having" means he doesn't expect to collect it.

You said you've known him two years. That's the asset in this file, and it's worth something, but it isn't collateral either. I'd fund small, $25,000, and see how he behaves through one full cycle before you go to 40. Cheap information.

Something nobody's priced: contact rates on outbound have been drifting down for years as people screen calls, so his cost to produce a lead rises over time while client price expectations don't. That's a slow squeeze on his 13 percent margin independent of any client leaving. If you're lending on a 12 or 18 month facility it probably doesn't bite. On a rolling multi-year relationship it does.

Fund it at 25 with the exclusions and the no-draw covenant @ledger described, and get the client agreements @fathom mentioned first. I've been a client of shops like this and the difference between the ones that survive and the ones that fold has been whether the owner sold or supervised. Nine seats and he's taking an $8,000 draw, so ask what he actually does all day. If the answer is manage the floor, his revenue stops growing and he loses the top client eventually. If the answer is sell, ask who's watching the callers.