Using Letters of Intent to Increase Cash Flow

When it comes to selling to businesses, one of the issues that creates cash flow issues is the need to wait until contracts are signed to receive payment. For decent sized companies, even when a company has communicated that they have decided to use your company, it can take another 60 to 90 days to get a contact signed and even more time to receive payment.

When your customer gives you the good news that they have decided to purchase your product or service, you usually have to then start the legal process of getting an legal contract signed with the customer. This can take from 30 to 120 days. Using a letter of intent (LOI) can get you a little money upfront while you and your customer work on the real agreement.

“Using a letter of intent (LOI) can get you a little money upfront while you and your customer work on the real agreement.”

Here is some insight on how to use them:

  • What is a Letter of Intent? The letter of intent (LOI) is a simple document that helps you get paid quicker. The basic idea is that even though your customer and you have not signed a formal agreement yet, you will sign this LOI that states your mutual intention. intentions. The most important part for you is that one of the provisions states that upon the signing of it, you will be given a deposit or advance payment that allows you to commence the work. Because LOIs are short documents (usually 1-2 pages), they can be reviewed quickly by a customer.
  • Benefits to Customer – Getting Started Quicker. Customers understand that their internal legal process takes time and if you can give them a way to get started without having to go through that process, many will take it. Using an LOI allows you to start the work and meet their timelines as opposed to waiting for a contract to get signed.
  • Benefits to You – A Non-refundable Deposit. Communicate that the LOI is non-binding except that they will be providing you a non-refundable deposit and upon the receipt of the deposit, you can start the work. Generally the deposit is 20 percent of the total cost of your product or service.
  • Offer LOI During Sales Process. When a customer communicates they want to use your product or service, communicate that your standard process is to use a LOI. Communicate that this is your standard process.

Not all companies will agree to an LOI. And at your first attempt they will likely say no. But when you communicate that it is what will allow you to get started right away even before a contract is executed, and their only downside is the deposit, many will see the benefits and everyone wins – you get a little cash and they get the project going as opposed to in 60 or 90 days.

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