Inventory-Based Lines of Credit How one company deals with a common cash-flow problem

Jeffrey Martinez-Malo, president of Ocean World Fisheries USA, a Miami-based importer of shrimp and crab from Latin America to the United States, had a problem-but it was a good one to have. "We're able to sell all the shrimp and crab we could import and more," said Martinez-Malo, who resells the frozen seafood to a network of large and small clients around the country. "But when suppliers put the product in a container, they expect to be paid immediately."

Without the luxury of paying suppliers in 30 days, Ocean World had a potential cash crisis on its hands every time it bought a container of shrimp or crab, even if they had buyers waiting. To help solve his cash-flow problem, a lender introduced Martinez-Malo to Gerber Trade Finance, a company that provides inventory-based lines of credit to companies. In December, Martinez-Malo said he obtained a $300,000 line of credit from Gerber. His line has since been increased to $600,000.

Keeping the cash flowing is a perennial problem for small companies, especially in slower economic times when customers want to hang on to their money. You do good work or ship a product, bill your customers, and the teeth-gnashing delays begin. A commercial credit line from your bank can help, but if you need a lot of cash on a regular basis to finance transactions, alternatives are limited.

Gerber Trade Finance, based in Manhattan, is unique in that it lends money based on inventory rather than receivables, assets or purchase orders. And rather than financing individual transactions, it provides a revolving line of credit for business owners at 2 percent above the prime interest rate. "All our clients are small businesses-they often generate orders faster than receivables," said Jeff Koslowsky, executive vice president of Gerber Trade Finance.

With inventory synonymous with liability right now for so many companies, it is unusual to find a lender that makes inventory-based loans its specialty. "We like inventory, but not many people do," said Koslowsky. "Nobody in the market does exactly what we do, which makes us interesting at the very least."

What makes inventory-based lending so unattractive to lenders? "In terms of liquidity, it's below receivables-based financing," explained Koslowsky. "Also, inventory values can decline very quickly. We have to be very hands-on with the industries we deal with, not just our particular clients."

Gerber Trade Finance is not a bank. In fact, the company borrows from banks to help finance its loans to small businesses. The 5-year-old firm has 15 employees and is owned by Investec Group, a merchant and investment bank traded on the Johannesburg stock exchange and by Gerber Goldschmidt Group. "In the world of inventory financing, there's the POs [purchase-order lenders] and me," said Koslowsky. Purchase-order lenders offer loans on inventory for individual transactions-once a customer has secured a big order and needs a loan to help fill it. Gerber takes a different approach. The business owner doesn't need to have a buyer in advance, and the loan is in the form of a line of credit rather than being based on individual transactions.

Gerber offers lines of credit from $250,000 to $2.5 million to its clients, mostly small businesses with annual gross sales between $3 million and $25 million. Clients use the lines of credit to pay their bills, pay it back when they get paid and then use it again for the next order. "The two statistics we look at most closely are inventory days and receivable days," said Koslowsky. In other words, he tracks how long inventory remains in stock before it is sold and how quickly the company gets paid once it makes the sale. Together, these figures make up the trade cycle. "A good trade cycle is 30 days," Koslowsky said. "Shrimp is 30 days. Steel is 30 to 45 days. Toothbrushes are more like 90 days." (Marble and granite are the longest, at about 120 days, he said.)

Koslowsky has about 45 clients right now in about 25 industries-ranging from luxury car accessories and children's electric toothbrushes to steel, scented candles and seafood. "I check shrimp prices nearly every day," said Koslowsky, who works closely with all his small-business owners. This hands-on approach means there are fewer surprises, and if things go wrong, Koslowsky can move quickly to help his clients. "I have a whole network of contacts, including my clients, who are potential buyers," he said. "We're very equipped to liquidate inventory if we need to."

Ocean World uses its Gerber line of credit to make advance payments to its suppliers in Colombia, Panama and Venezuela. Many of the companies it deals with are investing in building and maintaining aquaculture systems. "I go abroad to visit with our producers," said Martinez-Malo. "I help them manage production, make sure quality is consistent and help them package the product."

To help its shrimp suppliers keep up with demand, Ocean World advances money on its orders based on the projected harvest. Farm-raised shrimp are grown in brackish ponds, which have salt water pumped into them from the ocean. "We use genetic technology to promote high yields and growth rates," said Martinez-Malo. "It's a lot like raising cattle or chicken."

Paying his suppliers immediately, and sometimes in advance, improves Martinez-Malo's supply, allowing him to sell more farm-raised shrimp. Ocean World sells farm-raised shrimp for about $3.50 a pound, and ocean shrimp, or "wild" shrimp, for $7 to $9 a pound. Martinez-Malo said he prefers selling farm-raised shrimp because the market is much more stable. "There are never really crashes on farm-raised shrimp [prices]," said Martinez-Malo. "Only high-priced seafood items will crash-like jumbo shrimp and lobster tails. With the market fluctuating constantly, you have to ride the cycles all year to make money."

This year, his company will sell about 4 million pounds of mostly farm-raised shrimp. "Last year, it was about half that much," said Martinez-Malo, attributing his sales growth to Gerber's financing.

Gerber's Koslowsky said he bases his credit decisions on the experience of the people he lends money to. "Our number-one criterion is people," he said. "I'd rather be under-collateralized and work with people I trust than lend to people I don't want to do business with."

Jane Applegate is a syndicated columnist and the author of 201 Great Ideas for Your Small Business. For a free copy of her "Business Owner's Check Up," send your name and address to Check Up, P.O. Box 768, Pelham NY 10803 or e-mail it to info@sbtv.com. Sarah Prior contributed to this article.