Question: My business is 11 years old and growing each year, but we still have a huge debt hanging over our heads due to bad purchasing early on, which I financed on credit cards. I need working capital to pay off my bad debt and have money to market myself better now. What can I do?
Your problem raises a couple of questions: Who owns this outstanding debt? And what are your financial priorities for the company?
First: You mention outstanding credit-card debt, but it’s not clear whether this is personal credit-card debt you incurred to fund the business startup. If you can separate your personal debt from your business debt, that will improve your company’s financial profile and help you get working capital.
“Make sure the business is set up as a separate legal entity, such as a corporation or LLC. Then have the debt show up on the company balance sheet as payable to you, as the owner,” says Bill Hettinger, author of Finance Without Fear: A Guide to Creating and Managing a Profitable Business. “When the business has its own financial statements and a current business plan, business assets and cash flows can be used to help reduce the debt and obtain working capital.”
Second: Figure out your financial priorities. Do you want to focus on eliminating the credit-card debt or investing in expansion? If you defaulted on old debt that has been handed over to a collections agency, the damage to your credit is done and can only be repaired over time, says Mark L. Rockefeller, chief executive of StreetShares.com, a peer-to-business lending platform. “I would ignore it, focus on raising working capital to finance growth, and pay the debt off later out of that growth,” he says.
If, however, you’ve kept current on your payments and they’re hindering your growth, then you should focus on clearing that debt now. Here are some options:
Equity: Can you bring in a partner with some capital? Rockefeller suggests a friend or relative who could purchase a stake in your company, or a share of future revenues.
Assets: Maybe you have property or equipment you could convert into cash by selling it and then leasing the space or machinery instead, suggests Russell Hackmann, president of Manhattan-based Harborcove Financial, an investment and advisory firm.
Refinance: With 11 years of revenue and—presumably—positive cash flow, you may be able to refinance your credit-card debt into more affordable payments, Hettinger says. If you want $300,000 or more, look for a lower-rate bank loan, or, for smaller amounts, a micro-loan from a nonprofit lender. The move could cut your interest payments in half and “create instant cash flow and a ready source of additional working capital,” Hettinger says.
Alternative lenders: If your credit score won’t qualify your company for a bank loan, you could approach a merchant-advance loan company or other alternative lender. These lenders “tend to look at more or different variables and business records than others do when evaluating a business’s ability to succeed,” according to Daniel DeMeo, chief executive of CAN Capital, which does small business lending and merchant cash advances. In an e-mail, DeMeo said his company works with businesses that have significant credit-card debt and can arrange to directly pay off debt in the form of a balance transfer to a new loan.
Be smart and investigate alternative loans thoroughly: Most have short terms—typically three to nine months—and their total cost can amount to annual interest rate equivalents ranging from 50 percent to 100 percent.
StreetShares, Rockefeller’s company, specializes in a newer form of lending known as peer lending. Lenders compete to back a portion of a small business loan and the lowest bids combine into a single loan. “We require reasonable, but not perfect, credit,” he says.
A new loan, if you can qualify, could provide working capital, but you might also try improving your cash flow by trying to collect payments faster, Hettinger suggests. “Often, working capital already in the business can be freed up,” he says. Try invoicing daily, instead of weekly. Use electronic payment systems so you’re not waiting for checks in the mail. Set tighter payment terms and enforce them. All these steps can speed up your cash collection cycle, Hettinger says—and help you pay down your old debt.