A Case Study for Small Business Financing

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Thinking back to many years ago when I launched my first logistics company in the 1980’s, my first and later encounters with securing small business financing seemed like a good case study. 

It was a different time. My clients ranged from small manufacturers and distributors to Fortune 100 companies, and during the early years I never had an issue collecting from any of them, timely. Thus I never required financing. I began with $4,000 in working capital and let it grow.

Local merchant don’t necessarily have credit issues, as their clients either pay in cash, or credit, at the time of purchase. But those lcal businesses that rely heavily on payment by credit card, now have a cash flow issue, as the credit card processors have to process the card payment and then issue the local business their money, less fees.

So before I get into my story, for those types of business there is Merchant Cash Advances. And if you’ve already gone that route and signed the wrong financing deals and, gotten yourself in trouble, consider a do-over with a merchant cash advance consolodation program.

Moving back to my exeprience, my business B2B, not B2C, so I replied on invoicing and collection. Old school. By the end of the first year we were billing $120 – $130,000 a month, and everyone paid their respective invoices within 30-45 days, on time, without incident. It was an age where businessmen were still governed by a sense of honor and respect. Good reputations were worn proudly.

Fast-forward to the next decade and I re-entered the business in the early 1990’s. We developed a slightly different model with more reach and that business grew eventually to $500,000 per month of revenues by late 1998. But times had changed, and from the initial launch of that business in 1991, almost from the outset we faced issues with collections. People simply couldn’t, or wouldn’t pay timely.  Everyone it seemed was or pretended — suffering a cash flow crunch, with an outward ripple effects.

This changed everything. We needed cash flow financing to not only sustain, but grow.

A Case Study for Small Business Financing

Like many entrepreneurs I was good at the area of business I was in. Which is why we grew. But I had zero education regarding finance or economics, or even business for that matter. I had instead always relied more on common sense and intuition than any formal business therories or blueprints. And when I needed financing the same rule applied. However, as it turned out, it wasn’t really that complicated.

If I obtained financing there would be a cost, of course. So I first needed to know what I could afford. In my later days running that first business, in our third year we acquired another company. With it an intensive cash flow requirement. When the banks wouldn’t help, I went to the streets and made a handshake loan that cost me $650 per week for about a year — until I eventually made a deal to pay it off. But in taking on such high interest payments had contributed to why I had to sell the business.

Back to the newer and larger company, I needed to make sure I didn’t over leverage my business as I had done inthe 1980’s. So what could I afford? This is what I needed to determine. Some enterprenuers race to get the immediate cash, with the idea that they’ll work out a wy to manage the costs later. Take it from first-hand exeprience, that is a recipe for disaster. 


  • (a) gross margin per job; total sales minus direct cost.  
    • If you subcontract services, then the cost of the subcontractor is a direct cost.
    • If you have multiple sub contractors, like for example if you were a general contractor who hires painters, electricians, etc, then they collectively are the direct cost.  
    • If additional materials are paid by you for that job specifically, then add it on, if they are contained within the subcontractor’s invoice, then don’t.
  • (b) your monthly operating profit. Add up your monthly Gross Profit (from above), and now deduct from that your monthly overhead; rent, phones, internal staff, licenses, etc. if you have yearly expenses, simply divide by 12 and use that number.

Once you’ve established an average of of your monthly invoices, your average profit from each job, and the overhead that that gross profit has the cover, you easily come to how much discretionary funds are left.

“Use the company P&L and Balance Sheet to review the aging receivable reports to determine past and future cash flow.” — Sal Del Italia, Franklin Merchant Capital

In my company’s case it was a relatively new business, and regardless of the big name clients we had — Dupont, Exhibit Group — Jaguar, Ford –, Sumitomo of America, United States Carpet Company, American Express, and the federal Reserve, to name a few — we didn’t fit into the banks lending criterion at the time. 

So I began researching, which took effort because in 1996 there was no substantial Internet resources yet. Research was still more akin to a journalist’s activity — making call after call, getting lead after lead, until, finally you could narrow your search and find the available options that fit the criteria.

We chose receivable financing, or factoring as it is also referred to. The first firm I signed up with dealt more with industry level companies, but offered a program to buy our receivables, weekly, in exchange for a 50% advance against the value of those receivables, and the balance released to us when the client paid the invoice (to the financing firm directly), less their fees, which were 3.5%.

NOTE: When you enter into receivable financing agreement you will usually have to sign UCC-1 document, essentially giving the lender ownership of those receivables.

The owner of that firm (who I did business with again years later for $100,000 equipment loan) gave me a piece of advice;

“You should never buy short and sell long.” – 

I didn’t get it, back then.

But what he was saying is that there is a cost to money, just like any other expense you might have — salaries, leases, or rent. If you sell long and buy short, you’ll erode the cash flow required to sustain operations. So it’s about money management; buying long vs short, and having the profit margins to aford such a financing deal. Some companies, those that earn small margins with high volume are not suited to receivebale fiancing; because you’re paying a fee for each transaction and each invoice. For those types of businesses they are better served by more traditional long term loans or lines flexible lines of credit. 

Through those years (1991-1998) I was able to find two other firms I dealt with, each replacing the one I had before it; the first advanced 85% of receivables with a fee of 2.5%, and the latter was set up solely for the transportation industry to provide the same 85% advance, but at a 1.5% fee.

So while you may gain the immediate cash you need in the short run, you have to also assess whether the structure of your business and your profit margins can absorb and sustain those fees over the long run, in line with your operating budget. 

Do your homework, research thoroughly, as there are many options out there. Some may be significantly more advantageous for your business situation.  Happy hunting, and best of luck with your endeavors!

For more about traditional small business loans check out SBA.

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