Here is the situation. We own a business, my parents and I. With the slow economy we have piled up debt on credit cards used for business inventory purchases in the neighborhood of 120,000. The bookkeeper and my parents want me to take out a home equity loan to put 60-70000 back in the business....still leaving us about 50000 in debt. I just see this as a bigger problem. We will be turning unsecured credit card debt into a secured debt by putting the debt on my house.... This was not something that happened over night. We just were overspending and the debt has grown over the past 2-3 years. Now we are back in control but I dont see a way to pay this back without somekind of outside help. Any advice would be greatly appreciated.
Who is the actual responsible party for the cc's? You, your parents, or the business? If these are business cards do they have a PG on them?
Going forward from there, what is the legal status of the business? Corporation? Subchapter S? LLC? Partnership? Sole Proprietorship? Next, does the business remain viable, and what do you want to do with? Best to know what your constraints and your goals are so that you can define the options.
Is this a corporation, sole prop., partnership or LLC? Do you have employees? Are all taxes paid especially the employee trust fund taxes.
The business is a corporation. The credit cards are in my parents name. Now one of them maybe in my moms name and the business so it is a business card. It is a viable business that we are going to continue to run... No employees just my dad and me and a bookkeeper comes in once a month. All bills and taxes are paid.....we are just behind on the credit cards
This is a little more complicated than it seems, your bookkeeper should run a cost of credit analysis to locate the most economically feasible payback method. For example, I'm "assuming" the bookkeeper wants you to put the $60K-$70K in as "capital", not as a "loan" to the business. Otherwise you are just swapping debt on your balance sheet. So, how "you" get paid for this debt service becomes a taxation question: does it come out of your income? Or is it a "return of capital"? There are tax consequences for you which could impact the business and you more than you realize. Has your bookkeeper run an estimate/projection for payback? How ling would it take the business to pay it back? Also, what is this inventory? Is it something which could be sold at discount to raise cash to payback the business CCs? I would not recommend taking out the home equity loan until you have looked at all the possibilities and consequences. You also need to determine where your business credit stands, and its impact on your ability to purchase materials, supplies and inventory. An analysis of why you ran up so much in inventory needs to be done also. Perhaps I am missing some details but this appears to show some lack of purchasing control.
Does the "bills" include owner salaries? After bills, including salaries, is their enough profit to purchase inventory?
Good questions. In the evaluation, you should be looking at obtaining some sort of business line of credit. If this is a viable, ongoing business, you need to establish business credit and use it to run the business. As Bizwiz said, there are a lot of tax implications. It is better to keep business debt with the business and not mix business and personal debt. The bad part is, that depending on how you structured the income of money from your house, you could end up with unfavorable tax implications on both sides. And, your personal assets are at risk for a business not solely owned by you. I wouldn't do it.
We are a few months behind. We send some kind of payment every month.. The problem is not with the inventory. I just over spent over the past 5 years or so...so it just slowely piled up. I was very stupid and ignorant...so maybe it just serves me right to put my house up to bail out the family business. It is my business now. My father is 80 and my mom has dementia so I am the main person running it.....We have everything paid as to salaries...taxes....its just we cannot see a way to get past the ccs....I was thinking now that I have things under control.....that we should just pay off the lowes credit card balance and use that for buying inventory. If we stopped paying on the other 3 then all they can really do is call and send nasty letters since it is just unsecured debt.....am I wrong in this?? We have plenty of other credit cards that we have not used.
What can they do? They can sue. The discussion with your bookkeeper and an accountant are very good recommendations and very smart first steps. Shuffling debt around is not the most effective way of solving the problem. Perhaps now is the time to do a business plan that accounts for the reduction of the debt. An equity pull on your home should be considered only as part of a long term plan to reduce the debt, and, I would opine, only as the last resort. You might want to consider an SBA loan. One of the things to look for is floor planning the inventory or in some way converting the current revolving debt into a more structured debt. A realistic business plan will point out what your alternatives might be. With a 12x annual inventory turnover, cash flow would not seem to be the problem or a stumbling block in structuring a business loan or line of credit. You also need to assure that receivables are not getting out of line with the normal business flow and contributing to the problems. Until that plan is considered and in place, I would also recommend that you avoid putting anything else on plastic, either yours or the business card(s), unless it is absolutely necessary. I am sure that there is a SCORE branch in your area that might be of assistance in determining what is the best course for your business and for you.
Another question: Is this actually 'inventory' in the classic sense, or is it materials and supplies (consumables) for use? Buying it from Lowes sounds as if it is the latter, and you are in the construction field, buying materials to use on the job. If that's the case, what sort of payment structure do you impose on your clients, and what is the age profile of the receivables? (In other words, is your 12x annual inventory turnover matched by a 12x turnover in receivables?)
I am not familiar with Score. I did look it up and there is an office within walking distance of my location.
Not sure if you meant this for me. I dont buy material from Lowes. We sell vitamins and nutrtional products. So it is inventory in the classic sense.
The reference to Lowes was in response to your statement of paying off the Lowes card. SCORE (Service Corps of Retired Executives) is a good resource for small businesses. It is no substitute for a good business plan. They will help you prepare one. But first it will help to know where your business stands. Bookkeeper and accountant can help paint that picture. SCORE can help you ask the right questions given your specific circumstances.
Retail sales or wholesale? It's beginning to sound as if might you have an expense problem, but that's speculation on my part. The operating expense part of the equation should not be ignored. Do you have a significant portion (>10%) of inventory that is not moving at the 12x rate, hanger queens, if you will? Could you liquidate under-performing inventory to recover your cost and pay-down the debt? Random thoughts, hopefully constructive.
Thanks for your help Oracle and everyone I greatly appreciate it. We do not have a whole lot of inventory. It moves very fast. we just spent more then we made over several years and now stand in this predicament. Does the SBA have loan programs for debt consolidation?
