Your biggest customers can sometimes be your biggest problems.
The start-up company distributed chemicals and chemical storage devices to customers in a number of industries, including energy, paints and coatings, resins and polymers, and food processing.
“Although most of what we distribute is basically a commodity – for instance, we sell the exact same stored nitrogen as anyone else – we found our niche by offering custom, repackaged quantities, including smaller orders that our larger competitors normally wouldn’t bother with,” said the company president.
The company was staffed by the president, two salespersons, and four warehouse workers who handled incoming inventory, repackaging, and order fulfillment and shipping. They also would personally deliver certain orders to local customers.
Cash Flow Problems
The company had a handful of suppliers – including two from outside the U.S. – that were able to meet most of its needs on a regular basis. On the sales side, revenue had increased steadily through the first year of operation.
“We were the perfect middle-man,” said the president. “We just had to keep both sides – our vendors and our customers – happy.”
That was easier said than done, even as business picked up. “We’d go to trade shows for the industries we wanted to work in, and that worked out well. We came to be known as the company that could supply unique quantities very quickly,” he added. “The problems started when the payments due to our suppliers piled up more quickly than the payments coming in from customers. We just couldn’t keep up.”
“It [the cash flow problems] all came to a head when an important vendor suspended shipments to us because we were so far behind,” he said. “It was embarrassing, but I didn’t know what to do. I had to make payroll…I had to make tax payments. The vendor had actually been very patient, but there was only so much they could do.”
Adding to the aggravation was that fact that outstanding receivables would easily have covered the company’s obligations to suppliers and also provided the company with a comfortable operating margin. “You’d recognize the names of some of the companies who owed us,” the president said. “They’re household names. I guess, if you’re not careful, your biggest customers can also be your biggest problems.”
The Action: Contacting MP Star
The president had read about invoice factoring and was somewhat familiar with how it worked. He was hoping to find a local company to answer his questions, and he discovered MP Star Financial during an Internet search.
During the first conversation, MP Star representatives explained exactly how the invoice factoring process works, the fees involved, and how the company would be paid. “They didn’t make me feel stupid,” said the president. “I have a science background, not a finance degree. They were very patient and – this was really important to me – not pushy.”
After reviewing the company’s outstanding invoices, it was determined that the amounts due from the large, slow-paying customers would easily cover the funds due the company’s suppliers, including the one that had stopped shipments.
Creating a Cash Surplus and Paying Vendors
The business entered a funding program where MP Star would factor its outstanding receivables, providing almost immediate payment of invoices due.
In addition, MP Star contacted the vendor who had shut off deliveries and arranged to have the vendor paid in full that week, with funds from the factored receivables. The vendor re-started deliveries as soon as the payment was received.
The Result: Healthy Cash Flow Management and Continued Growth
Several years later, the company still factors most of its receivables through MP Star. “It’s worth it,” said the president. “My cash flow is predictable and I don’t have to chase down late-paying customers anymore.”
The company has grown to more than 20 employees and has nearly doubled its sales three years in a row. “I’m not sure where we’d be if we hadn’t tried factoring,” said the president. “For us, it was a great solution to our cash flow problems.”
The Lesson
If your slow-paying customer receivables are stopping you from paying your vendors, MP Star Financial can probably help. But don’t wait! Call MP Star Financial at (800) 833-3765, extension 150 to talk about cash flow management solutions and start-up company funding.
Can’t wait? Apply for invoice factoring online.
For more MP Star Financial invoice factoring case studies:
Business Case Study: Invoice factoring leads to IRS tax settlement
Business Case Study: Invoice factoring helps new company get over the start up hump
Business Case Study: Invoice factoring helps company win major contract
Business Case Study: Invoice factoring helps company survive cash flow interruption
Business Case Study: Invoice factoring partnership boosts company’s exports
Business Case Study: Invoice factoring works when business is good…but cash flow is terrible