small business management

Kevin Semcken got the call in the first week of January. His loan officer had some bad news. The bank was changing the terms of the $2.5 million line of credit it provided to Able Planet, Semcken's Wheat Ridge, Colorado-based audio-equipment business. Under the new terms, the bank would no longer front the cost of raw materials and manufacturing. Semcken had been working with the bank for almost three years and had never missed a payment. And though Able Planet was not yet cash-flow positive, he was stunned. Without those funds, he would have no way to pay for inventory demanded by retailers such as Wal-Mart and Costco. "They waited until the last minute and dropped it on us," Semcken says. Until then, Able Planet's business plan had been fairly simple. The company used the bank financing to fund the manufacturing of Linx Audio headphones. For more than a year, Semcken had been using the funds generated by the headphones, which retail for $24 to $299 a pair, to develop a promising new technology called Sound Fit -- a listening device designed to fit snugly in the opening of the ear canal, eliminating nearly all ambient noise. Sound Fit, Semcken believed, could open entirely new industries for his business, including hearing aids and Bluetooth devices. Indeed, Semcken had secured nondisclosure agreements from 30 would-be customers interested in seeing more. But before Semcken could move forward with any of these negotiations, he needed funds to create production-quality prototypes, as well as operating cash for the headphone business. After hanging up with his banker, Semcken took a quick inventory of his options. Like other manufacturers with orders on the books but no funds to produce them, he could try a factor. But factors, which lend against receivables, charge exorbitant interest. Perhaps he could find a less risk-averse bank. The company also had more than 20 angel investors who had recently kicked in $1.4 million. But that money was gone. Would those investors be willing to pony up again so soon? This wasn't the first time Able Planet found itself high on promise and low on capital. That was pretty much the condition in which Semcken found the company at a technology conference in Denver in 2004. At the time, Semcken was the head of HealthTek Ventures, a venture capital firm in Evergreen, Colorado; Able Planet was a two-person start-up with a promising idea -- headphones embedded with a magnetic coil to enhance sound quality -- but a disaster of a balance sheet. Semcken, who suffers from hearing loss in his left ear, was intrigued. When he listened to music, he had trouble identifying high-frequency sounds like those produced by cymbals. He asked Able Planet to give him two headsets -- one with the coil and one without -- and tested them by listening to Dean Martin's "You're Nobody 'Til Somebody Loves You." "When I switched to the Able Planet headphones, I could hear the cymbals," says Semcken. "I was instantly a fan." Semcken invested in Able Planet -- he also brought on family members as investors -- and eventually took over as CEO and chairman. In 2006, Able Planet's Linx headphones won an award for innovation at the Consumer Electronics Show. Soon, the calls began pouring in. By 2008, revenue had jumped more than 1,000 percent, to $2 million. see the full detail in the attached file