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Chapter 1
Introduction
A True Story
 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.
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.
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