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Relying too much on credit cards
Dear
Small Biz Adviser:
I have financed my small
businesses with credit cards for too many years, and now the interest
and charges are getting ahead of me. I have already put a second
mortgage on my home, but that is not enough. I need a loan for all
my credit debts that is low interest. I keep current with the present
payments, but due to the volume of debt a creditor is wary. Are
there ideas or places that help a small biz guy like myself?
Thank you,
R. Wayman
Dear R. Wayman:
You appear to be all loaned out. I am
left with more questions than solutions: Why do you keep using your
credit cards? For what did you use the second-mortgage money? Why
do you have high interest rates on your credit cards if your payments
are always current? Which creditors are wary? I could add 10 more
questions.
Typically, you use credit cards when enough
cash is unavailable. I am led to believe you may be at or below
the break-even point with cash flow. It appears that for some time
your cumulative, monthly cash flow has been negative. You spend
more than you collect. Among the possible
causes:
- Your expenses do not result in sales equal
to the expenses plus money for profit. Don't spend on something
that doesn't result in a sale.
- Your operating expenses can be reduced or
eliminated if they don't result in sales. Again, do not incur
an expense that does not result in a sale.
- You pay too much for goods, giving yourself
insufficient gross margin to pay operating expenses, interest
and taxes to leave some net profit. You might have to increase
your prices or eliminate products and services that are not good
sellers.
- You have a seasonal business. If so, you
need to plan expenses of inventory before your season, not during
or just after the season ends.
- You are not advertising and promoting your
business in the right places at the right time. Examine the advertising
and promotional habits of your best competitors. I follow the
winners. I would like to be there first, but not everybody can
be first.
Regarding the second mortgage, did you use that
money for the business? If so, did you have a budget? Did you consider
using the money to pay the balance on the high-interest credit cards?
High interest rates on credit cards generally
result from one of three reasons:
- You have no credit history.
- You do not have a good credit history, and
your credit card company typically deals with riskier customers.
Issuers like this charge higher rates from the outset. Sometimes,
they will even demand a deposit equal to a percentage of the credit
line.
- You have failed to make timely payments for
consecutive months and the issuer has raised the rate.
Finally, you say "a creditor is wary." Frankly,
based on what little you convey, I, too, would be wary of issuing
a loan. You do not appear to be in control of cash flow. If I had
more information about the nature, history, market and finances
of your company this response could be more specific. All I can
do is point out the possible sources of your problems. I wish you
well.
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