UTC-Chapter 1

Jerry was born with an entrepreneurial spirit. After working years in various jobs for other people, he wanted nothing more than to be his own boss. Finally he decided to strike out on his own and begin his own business.After the initial startup costs for his storefront, rent, equipment, and materials, he had enough capital to hire an employee and get under way. Like most startups, the first few months were slow as expected but business improved somewhat each month. He wasn’t setting the world on fire, but he was optimistic.

Chapter 1

The complete first chapter
is printed below.
(© Dash Point Publishing, Inc.)

Introduction

A True Story

He had enough working capital to operate for what turned out to be about six months. When he began, Jerry thought this would be enough to get under way until the store became profitable. He had his materials, a good location, and everything needed to begin selling his products. He was conscientious and hard-working, put in many long hours, and enjoyed being his own boss.

With his good location and modest marketing efforts, customers found their way into Jerry’s shop and placed their orders. Smaller purchases were paid up front, while larger ones required half down at the time of the sale and the balance upon completion. Most customers paid with a credit card and some paid in cash.

During the early months Jerry’s sales were not quite what he had hoped. He realized his sales needed to increase, and this could be done by increasing the number of his typical small customers, or gaining a few customers who would place consistent, large orders.

One day a woman walked into his shop and inquired about some banners she needed. Like most new customers, she asked about the design, size, colors, material, delivery time, and price. After learning about Jerry’s products and prices she seemed clearly interested in placing an order. Most new customers who asked the same questions she asked usually just wanted one or two banners. He expected this to be a fairly routine order. But then she dropped a bombshell.

This woman – dressed more professionally than most of his customers, Jerry thought when she first walked in – was the regional vice president of a well known self-storage company . This company had a substantial number of franchises in the area. Not only did she need a large number of banners which would be used at all the stores in the region, she needed them relatively quickly. And because of the number of banners she wanted, she required a significant discount from his regular price. Would he be able to deliver? If her company was happy with this order, there would be many future orders this size and larger. Oh, and by the way…her company would require 45 day payment terms with no down payment.

As any business owner will appreciate, her required terms posed a dilemma for Jerry. This was exactly the kind of new customer he needed, ordering in large volume with a steady and dependable flow. He wanted nothing more

than to make not only this big sale, but the ones that would follow. This customer could mean steady and sorely-needed income for his young company, and she could help establish his business further with referrals from the circle of contacts she and her associates could provide.

However, waiting 45 days to receive payment created two immediate problems for Jerry:

•	He would need to order a significant amount of new materials to make this many banners…and his suppliers would demand payment from him before he would be paid by this new customer.
•	He would need to hire extra help to get the banners made in time. This would temporarily swell his payroll and require even more cash out of pocket before he would be paid.

What should Jerry do? Should he turn down this order because he didn’t have the cash needed to meet the customer’s requirements? Or should he accept the order and then scramble like mad trying to come up with the cash needed to fill the order? What would happen to his business if he accepted the order but then couldn’t deliver because of inadequate capital?

Many business owners face Jerry’s dilemma on a regular basis. They may also be small shop owners, or lead much larger corporations dealing with millions of dollars of annual sales. However the problem presents itself, the dilemma is the same: “How can I grow my company – or simply keep it running – when I don’t have enough cash?”

Regardless of the size of your business or your industry, this book will address a well-established but little-known solution to the problem of slow cash flow. While this answer will not be suitable or available for every single business, it does work for a great many. Surprisingly, most business owners have never even heard of it, despite the fact that this type of financing has been around for centuries.

The Need for Cash

If you are thinking about starting a business or are already the owner of one, chances are high that sooner or later you will find yourself in Jerry’s position of needing more money than you have on hand. Maybe you’re just starting from scratch and have little more than a great idea or business plan, or maybe you’ve been in business for some time and have a long list of customers. In either case, inadequate cash on hand is a very common problem. It can happen for many more reasons than just wanting to fill a big order, as Jerry did.

Even if a business is started with adequate capitalization, it can burn through early reserves at a surprising rate. Whether sales are slow or exceeding projections, new or young companies usually require further capital to continue. This is true whether a company is struggling or successful; in fact successful businesses often need more cash. Their very success depends on the availability of cash to keep up with orders, meet payroll, pay bills and taxes, and meet all the financial obligations a business owner knows all too well.

Often a small business will get under way with funds the owner has saved, inherited, obtained from the sale of property or assets, borrowed from friends and relatives, charged to credit cards, and otherwise pulled together. These may be enough to enable the enthusiastic entrepreneur to open the doors for business, obtain the first few months’ orders, and realize the business can succeed. Yet many business owners run into a brick wall, despite (or because of) their success. Often this happens anywhere from two months to five years after they begin. It also happens to companies who have been in business for as many as fifteen or twenty years. What happens? Their cash on hand is not adequate to meet their expenses. In short, they have a cash flow problem.

Not enough cash on hand usually results from any or all of the following reasons.

•	Expenses are higher than expected.
•	Income is less than expected.
•	Receiving customer payments takes longer than the expenses required to fill orders.

When customers pay a business with cash or a credit card and that business runs short of cash, the cash flow problem usually can be traced to number 1 and/or number 2 above. When this is the case, the business owner needs to make adjustments to trim expenses and/or increase sales. This is commonly the case when a business’ customers are consumers.

Companies whose customers are other businesses or government entities can easily experience all three of the above problems. Like businesses selling to consumers, business-to-business and business-to-government companies need to make adjustments to address numbers 1 and 2. Yet as we saw in Jerry’s case, selling to companies or government agencies often necessitates extending terms to these customers in order to make the sale. Terms are often 30 or 45 days, but can be as much as 60 or 90 days for very large corporations. If a company cannot or will not extend the required terms, they lose a lot of potential business to competitors who will. This was Jerry’s dilemma.

He needed some quick cash to pay his costs for this order, but where could he find it? His own funds were exhausted and his credit cards maxed out. He couldn’t go to his relatives and friends again, and his business was much too young and not financially strong enough to qualify for a bank loan or line of credit.

Even if he could get an SBA loan he couldn’t wait that long to fill this order. Besides, he’d burn through the small amount it would provide and he’d need more cash later anyway. Venture capital was an unlikely long shot, would take way too long, and wasn’t suited to his industry. Even if it was, such funding would demand equity in his company and possibly even take over control. Obviously, Jerry was between a rock and a hard place. So what did he do?

He accepted the order and was able to obtain more than enough cash to purchase his materials and meet his payroll for this order. The cash was available, yet locked in his company through funds the order itself would provide later. Still, Jerry was able to tap into that cash long before the customer ever paid a dime. How?

Fortunately, he knew of an alternative form of financing few business owners understand and many are not even aware exists. Jerry knew a funding company that was eager to buy the invoice created for this order. With this knowledge he was able to unlock the cash in his company by selling his invoice for immediate cash.

How did he do this? Quite simply:

•	He accepted the order.
•	He arranged for the funding company to purchase his receivable.
•	He ordered his materials and hired enough help to make the product.
•	He delivered the product and created the invoice.
•	He sold the invoice and immediately was paid a large percent of the invoice’s face value.

With plenty of cash now in hand, Jerry paid his suppliers, met payroll, and still had enough funds to meet other business obligations and accept more orders. What’s more, the next time the self-storage company returned with another order for new banners, he welcomed their business and again factored (sold) the new invoice for immediate cash. Because his account was established, he didn’t need to reapply as he would have for another SBA or bank loan. All he needed was another invoice to this creditworthy customer, and he received his cash in about one day’s time…rather than waiting weeks or months.

In fact, because Jerry could provide 30 day terms to other large customers, more and bigger orders started to come in…which he factored as well. Thus his business expanded beyond small consumer orders (which he continued to receive) and he had plenty of cash to accept any orders that came his way.

Jerry had learned – and utilized – the secret of unlocking the cash in his company. What’s more, this secret would provide unlimited funds for his business while generating no debt to repay, as a loan would. And even better, obtaining this cash would occur much faster than any loan process he would ever undergo. Access to this cash would not depend on his having good credit, he could qualify despite the short time he had been in business, and more cash could be obtained easily any time in the future. All he’d need would be more orders like this one from customers like this nicely dressed woman who walked into his shop.

Jerry smiled self-confidently as these thoughts ran through his mind. Business was looking up.