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Business and personal expenses are a bad mix
Dear Small
Biz Adviser:
I started a business and began deducting my expenses for it as of
the year 2000. I paid for my expenses through my personal credit
cards. Now I am having a hard time paying the minimums of these
credit cards.
Will the Small Business Administration or other
agency write me a loan to pay these business expenses, so I can
bring down my interest payments from the credit cards? I have excellent
credit, and I don't want to ruin it.
I also bought a home year and a half ago that
has somewhat appreciated. I would not like to pursue a home equity
loan because I have read that if my home is secured through that
loan, it would be susceptible to foreclosure if the loan payments
are not met.
Thanks for your help,
Lane
Dear Lane:
Without question, the U.S.
Small Business Administration is the premier small business
assistance agency in this country. Go to its Web site, and you will
find hundreds of small business assistance initiatives. In fact,
the agency is the primary provider of outside assistance to Small
Business Development Centers and SCORE,
the two most popular organizations providing subsidized assistance
on the local level.
However, the SBA is not going to provide you
loan money or a loan guaranty to pay down or eliminate your personal
credit card debts. You are operating as a proprietor with no formal,
legal business structure operating apart from you, the individual.
You have mixed personal and business transactions in your personal
checking and savings accounts or both. This fact cannot be changed,
even if you have formalized your venture with a fictitious name
and occupational licensing and have opened and used a business account.
The transactions are still utilizing personal credit cards.
As for a second mortgage, you are wise to be
hesitant. Such a loan may be difficult in these shaky economic times,
regardless of a good credit rating, unless you are willing to consider
some of the well-advertised offers that will likely demand interest
rates significantly above competitive rates. I do not encourage
this course. You will only go deeper into debt, and the interest
expense will defeat the problem you are trying to solve.
I suggest you consider loan alternatives. Evaluate
how to better operate the business. It is obvious that money is
in short supply with you. Hold off on incorporation expenses until
such time as cash flow allows accumulation of ready funds to conduct
that legal procedure.
Then seriously analyze what appears to be negative
cash flow:
- Are you incurring unnecessary expenses in
the operation of the business? It is common for startups to purchase
items they think will be good to have just in case the need arises.
Don't buy anything right now unless it is needed and will result
in the generation of sales to meet its expense and create some
profit for you.
- Because you have this blending of personal
and business transactions, it may be necessary to examine some
of those personal expenses. Starting a business requires sacrifices.
I would dare say most startups have to make sacrifices at home
to give themselves a chance to succeed with the business venture.
Are you making enough sacrifices?
- Are you charging a competitive price for
the services offered? It is a very common mistake of many startups
to charge a discount price for fear they won't get any sales,
for lack of a reputation. This is a matter of fear vs. self-confidence.
There are many other questions to be asked of
you, but it is best you visit the nearest SBDC or SCORE chapter
immediately. Arrange for some free, confidential counseling. Have
a specialist help evaluate the strengths and weaknesses of your
venture. Develop strategies, and take actions that will improve
your likelihood of success. Meanwhile, watch how you spend your
money, and protect that credit rating.
I wish you well.
-- Posted: Sept. 11, 2001
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