Tuesday, November 17, 2009

Anatomy of a cash-squeeze bankruptcy

I recently had a heartbreaking conversation with a small business man who started producing a new type of fruit juice a few years ago. His family business was his "dream come true," he told me. He was thriving. This past month, he had to file for bankruptcy even though he was making money. Here is how it happened.

He was doing well, growing his business by getting distribution in large supermarket chains, and even turning a profit. And then came the financial crisis. This caused the supermarkets to delay payments to him - from the normal thirty day lag after delivery (called "net-30"). The supermarkets, though profitable, were having trouble raising working capital from their banks, which were in crisis. So to conserve their own cash, the supermarkets began going to net-60 and then to net-90 with their smaller suppliers like the juice maker. He told me one supermarket even had him on net-120, which meant that he would not get paid until four months after he delivered the juice to the supermarkets.

Since the juice maker was not getting his revenue on time, he was having trouble pulling together the cash to continue producing. Unlike the supermarkets, which have a lot of power, his own suppliers will not allow him to pay on a net-60 or net-90 basis. So the juice maker turned to his local bank, explaining that he was profitably selling juice to the supermarkets, and that he just needed to borrow money for ninety days to tide him over while waiting to get paid.

His local bank was feeling the effects of the broader banking crisis and refused to extend him more credit. He tried more banks, and the answer was the same.

Finally, he could survive no longer and had to fire all his workers and close production entirely. When I spoke to him, he was winding down operations.

"You know, I didn't mind helping bail out the banks when they were in trouble last year," he said to me. "But the least they could have done was help bail me out when out when I needed help."