The orders are there, the money's not

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Prints are expected to be hot this summer and the designs are flowing seamlessly from Toronto-based Mercy Studio, a firm that has been producing prêt-a-porter fashion for boutiques in Canada, the United States and Japan since 1994.

But it wasn't always easy. In its second year of operation, when Barneys New York placed a big order, finding the funds needed to create and ship the pieces south of the border caused considerable anxiety.

"I put my whole portfolio together and headed to the banks," says Jennifer Halchuk, who owns the company along with partner Richard Lyle. "I thought I would get a business loan but they were firm. There was no way they would loan Mercy any money."

Ms. Halchuk was finally able to secure a personal line of credit. "We needed $20,000 and that was all that my savings and a line of credit would provide. I remember being worried about whether it would all be approved," she recalls.

As a failsafe, Ms. Halchuk and Mr. Lyle would have had to sit down and make the garments themselves. "We're skilled at everything from design and cutting to sewing," she says.

"We have one employee and contract large orders out to local factories," Mr. Lyle adds. "We really do it all, including sweep the floor. We have a viable business with annual sales in the range of half a million dollars and a great track record, but money is always an issue. Sometimes we have financed our big orders by making costumes for videos or other local work. We would paint decks if we had to."

Murray Bryant, a professor at the University of Western Ontario's Ivey School of Business, says growth commonly leads to orders but no cash to process them. "Rapid growth is one of the most challenging things about running a business," he says. "It can take months to manufacture an item, and meanwhile there are staff and other overheads to pay and materials to purchase.

"If the business has to wait 60 days or more to be paid, you can be looking at seven or eight months. During this period, an investment of cash will be needed. More so now than ever banks are not keen to expose themselves to any liability — they're strictly in the business of making money for their shareholders."

Giles Osborne, manager with Parker Prins Lebano chartered accountants, strongly recommends companies make and stick to a five-year plan, keep their paperwork meticulously up to date and pay every supplier and government invoice on time.

"As a general rule, good business relationships are covered by good paperwork," he says. "Businesses often need to self finance, using their internal cash flow, in case they cannot get bank financing. They may use personal financing such as a line of credit, but this can be to their advantage, as the interest rate may be good. If you are running a business with a positive cash flow, you're in a good position for someone to lend you money when you need it."

Marie Larson has worked since 2006 to build her business growing and selling sprouts, including bean, alfalfa and broccoli. Her company, Toronto Sprouts, attracted the attention of food giant Loblaws, which sold the sprouts at two Toronto locations and it would like to expand the offerings across Canada. But Ms. Larson is stymied, engaged in a continuing search for the necessary funds to grow and ship.

That search has included banks, venture capital companies and angel investors. "Lenders only want to advance you money if you don't need it," she says. "Toronto Sprouts went from sales of $75,000 to half a million in 2008," she says. "To produce enough volume for a customer like Loblaws, I need to buy equipment and supplies. I also need to find a big enough location where we can grow thousands of trays of sprouts every week."

Part of Ms. Larson's problem, she points out, stems from the fact that her need came at the peak of the global financial crisis, which began in 2008. "I had my documentation and my business plan," she says. "I did have an investor lined up too. But he had to back out because his own investment portfolio collapsed."

The financial crunch also impacted Lorne Janes of Continental Marble, a 20-person company based in Newfoundland that sells countertops and similar molded cultured-marble products in Canada. They are used in places like nursing homes, where the hygienic, one-piece construction has strong appeal.

The second arm of Continental's sales is what Mr. Janes calls "factory in a box," where foreign investors purchase everything needed to set up a plant and produce the countertops themselves.

Until May, 2008, many of these offshore sales took place in the United States, but that end of the business died a sudden death during the downturn.

Mr. Janes has discovered the concept has legs in places such as China and West Africa, but there's a catch: Since the companies to which Continental is selling are new, securing financing to complete the sale is always a hurdle. Mr. Janes will have an order for a factory in hand, often with a letter of credit and even a substantial deposit from his customer.

"The programs that exist, such as EDC, don't seem to be set up to help businesses that need, say, $250,000," Mr. Janes explains. "They are interested in making loans of $5 million or $10 million. I have gone to meetings where the individual in charge spent all my time telling me why he could not lend me the money, often basing this on facts that were completely incorrect or exaggerated. Also, the companies I deal with do not have all the expertise or staff needed. They don't have the paperwork required like five years of audited financial statements or a foreign affairs analyst on staff."

Continental persists until it can complete a deal, using funds from the domestic business, the goodwill of suppliers and creative solutions that he and his clients devise on a case-by-case basis. "My clients are patient," he says. "We work together. I give a little and they give a little. I have to pay for staff and overheads and material costs – I'm building machinery, don't forget, and putting together everything needed to make the end product."

Mr. Janes half-jokingly points out that he doesn't buy groceries when he's trying to finance an order. "We've been in business over 30 years." he says. "I have excellent relationships with my suppliers. I go to them and say 'Here's what I've got. What can I get?' And we have a very good credit policy: none!"

Professor Bryant says that's an excellent way for firms to deal with growth and the need for funds to process orders. "Companies can look at changing their business model," he explains. "Dell computers are a good example. You are paying for the computer before it is even manufactured. Businesses can at least specify deposits and progress payments to help themselves."

"I think businesses can do themselves a favour by having a bank balance," Mr. Osborne says. "Also they should take advantage of networking opportunities with groups like DemoCamp and York Technology Association for tech companies. There are angel investors out there, such as Maple Leaf Angels. Businesses can also try to partner with the customer and get financing that way."

Government programs, Mr. Janes points out, simply don't fill the void. "If you are expecting the government to finance your business, you are going to be disappointed. Every time we make one of our offshore technology sales, I have to come up with $150,000 or $200,000, and we do get it done."

Special to the Globe and Mail