Capital ideas for financing - small businesses - includes related articles - Cover Story

Nation's Business, Sept, 1996 by Sharon Nelton

David M. Dooley Sr. says his company faced the economic kiss of death" in January 1995. His largest supplier refused further credit unless Seasafe, Inc., could pay down its then-current debt of $1.6 million at a rate of $50,000 per week. A fiberglass fabricator in Lafayette, La., Seasafe had just had an unprofitable year, and, says Dooley, the company president, the business was "virtually unbankable."

Timothy L. Rashleger, co-owner of Milltronics Manufacturing Co., then in Chanhassen, Minn., got a similar shock on a visit to his bank. "In our suits and ties, [my partner] and I went downtown under the assumption that we'd been invited to sign papers at the bank to renew our line of credit," he says. Instead, the two learned that the bank no longer wanted to finance the company, which made computer numerical-control systems, which command the movements of metal-cutting machines.

"The fact that we had never missed a payment, were not borrowing more money, and had taken major steps in the company to manage our resources was not important to [the lenders]," says Rashleger. "Simply put, our line of $1 million was due in 90 days."

Capital. It's what almost every business owner at some point desperately needs but doesn't have - especially in the early years, when companies are starved for start-up capital or funds for expansion. And that's often when financial institutions are the least likely to provide help.

The overpowering need to find money leads to some business owners, finest hours - because getting financing requires every ounce of creativity and resourcefulness they can muster. Here are the stories of how some of them got the capital they needed.

Overcoming "Codependency"

As David Dooley puts it, he and the supplier to which he owed the $1.6 million had become "codependent" in the 10 years since Dooley had bought Seasafe. His company makes fiberglass platforms and walkways for industrial use, plus "cable trays" - ladder-shaped conduits for electrical cable. Seasafe assembled its products from components created by the suppher in a molding process known as pultrusion.

Dooley knew that to be competitive, he should bring the pultrusion process in a house. That would cut out the costs of a middleman, reduce overhead, and improve inventory control. But doing so, he says, "would be biting the economic hand feeding us." The supplier, he notes, had become a "source of secondary financing, by extending credit terms sometimes up to a year.

But when the supplier ran into some problems of its own, it wanted Seasafe to pay up - and to pay cash on the delivery of future orders.

Where would the money come from? Initially, Dooley looked hard for internal solutions. "The first thing we did was go to inventory and count each and every item on hand," he says. Dooley was certain Seasafe had at least 90 percent of the material it needed for the next three mo didn't have, it would purchase only as needed, even if a premium had to be paid.

"What we ended up doing," he says, "was liquidating inventory and turning the inventory into cash and turning the cash into payments." Within 90 days, he says, "we were able to reduce inventory by almost $250,000."

With accounts receivable in excess of $1 million, Seasafe also went into what Dooley calls "a vigorous collection mode," turning up another $250,000 in the same time frame. "We made deals with good customers and gave them discounts [for quick payment] because cash flow became more important at this point than profits," he says.

As Seasafe began to improve the management of its receivables and it became clear that it was going to pull itself out of the financial mess it was in, outside financing began to emerge. Premier Venture Capital Corp., a Baton Rouge, La., firm that had invested $250,000 in Seasafe earlier, put up an additional $500,000; it now owns 25 percent of the company

Premier's confidence in Seasafe enabled Dooley to persuade his bank, the Bank of Lafayette, to increase the company's operating line of credit to $750,000 from $500,000 and to let him borrow an additional $120,000 against the manufacturing facility.

The bank was now so sure that Seasafe was moving in the light direction that it didn't waver when Seasafe finally began to bring the pultrusion process in-house - a move that meant a six-month learning curve for Dooley and his employees and cost the company about $250,000. The bank "didn't panic one bit," says Dooley.

Nine months after the crisis began, Seasafe had paid off its supplier and had more than $170,000 in cash. Not long thereafter, Banc One, a national, bank headquartered in Columbus, Ohio, volunteered to fund the $400,000 that Seasafe needed to buy new pultrusion equipment.

This year, Dooley expects more than $8 million in revenues, up from $17.6 million last year, and his 75-employee company has been profitable in each of the past five months. It has even patched up its relationship with the supplier: Although Seasafe reduced its purchases, it is still a substantial customer.