Chelsea Marketing & Sales, a wholesaler of watches and toys in San Diego, needed capital. "My partner, Paul Koester, and I had three goals when we started the company, in 1991," recalls principal Steven Holtzman. "We wanted the company to grow quickly and eventually to go public. And we wanted to hold on to our equity until that initial public offering."

Supplier financing seemed to be a good option. But it alone couldn't propel Chelsea to the growth rate the partners envisioned. "With the help of our accounting firm, we found a bank willing to provide us with purchase-order financing -- that is, credit tied to an order as soon as we landed it." That allowed Chelsea to take on bigger orders, but unfortunately, financing rates were high -- "sometimes higher than credit cards," says Holtzman.

To help mitigate those costs, the company negotiated a second, asset-based financing arrangement, "so that we'd get money from a second bank, at slightly lower rates, as soon as we actually generated receivables." Funds from the second credit line paid off the first; Chelsea receives its profit when it collects accounts receivable and pays off the second credit line.

"It's a complicated, sometimes costly arrangement, but it's helped our company grow to $13 million in sales. And we've managed to hold on to all of our equity," notes Holtzman.

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