When we left Randy he had assembled five hundred thousand dollars in available credit on new credit cards. After all, he just needed to borrow money for twenty five days and then he would be able to pay it back from his incoming cash flow. He was borrowing time, not money.
The cycle proceeded as planned for a few months. He was paying very little interest on his loans via credit card and things looked pretty good. Then he got one whopping order from a government agency. He had been working on that order for a year. Man did he feel great when he got the order.
The amount of the total order was eight hundred and fifty thousand dollars. He figured out that he would net nearly half of that after all costs were paid. Then he got another order for over five hundred thousand dollars worth of equipment from the state government.
When he got the funds from those two orders he was going to be in clover. The sea of green money was all around him and he felt vindicated for all of his hard work. He ordered the equipment from his vendors and waited for the shipments to arrive.
When they got in his technical staff loaded the operating systems and put all of the software that had been ordered in the boxes. Then he shipped the goods for both orders within a week of one another.
Randy sat back and waited for the money to arrive. The federal client informed him that they had ordered a different version of the operating system and were rejecting the shipment until he could provide it to them. He negotiated a deal to reload the software at their location and sent his techs out to take care of that.
It took them a week to get that done. But that was no real disaster. The clock was still ticking on the receivables in Randy’s mind. After twenty more days the funds to pay his vendors came due and Randy paid them using the credit cards.
He was stretched to the max on all of his lines of credit. Then he got a letter from the government stating that the systems had a smaller amount of memory than was specified in the purchase order. Again they were rejecting the order.
He got his techs on the phone and they ordered the memory modules needed to upgrade the PCs in question. That took another ten days to fix. Meanwhile Randy was starting to sweat. His regular clients were waiting for their orders so he ordered a batch of systems to fill that requirement.
By now he was beginning to feel the cold winds of time passing on his neck. The pressure was mounting.
Then he heard from the state. They had a problem with several of the PCs that had been shipped to them. They wanted him to correct the issue which was a power supply problem before they would release funds to pay for the order. That was going to take two weeks to fix.
At this point Randy was totally freaked out. He had no more credit to use. His company was unraveling before his eyes just when it should be prospering. He called on a friend who offered this consolation. “Well Randy, you just hit the wall.”
A few of the people who knew Randy were trying to solve his problem by the next week. A finance guy at IBM finally helped him get a cash infusion from a hard money lender.
By the time the interest on that loan was paid Randy’s net take on those two huge orders was less than one quarter of what it could have been. Randy’s company survived but he remained constrained by his cash flow and had to cut back on growth.
His credit card companies then started to raise the interest rates on his cards. He had gone past due on payments on a couple of them. The limits got lowered and his problems with finance grew.
By the time it was over Randy had to sell a controlling interest in his company to a cash source that sucked most of the value out of it over a couple of years. Randy went back to work at IBM for a while.
Then he started another company. This time he pulled together funding sources before he got stretched out too far by his success. He’s retired now and lives in a grand house on the seashore. He made a lot of money in that second company. But he still shakes his head when he thinks about using credit cards to finance his first business.
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