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Expert Q&A: Failing Business, Rising Debt: When to Give Up

Erica Sandberg

May 27, 2011

Editor’s Note: CreditCardGuide.com is excited to bring aboard credit expert Erica Sandberg. Erica is a former credit counselor turned credit guru who provides expert credit and money management advice on TV, in print and online. Now, she will be providing expert advice to CreditCardGuide.com readers who need a sympathetic ear — and sometimes a kick in the pants — to get their finances back on track. Got a question? Ask Erica!

QDear Credit Guide,
I opened a new business in November 2010 after being unemployed for more than two years. I had sufficient money when I started the project, but because of the length of time without an income, I’m now really strapped and starting to build my debt on credit cards just to get by. I’ve not defaulted on anything, either business or personal (yet). However, I’m approaching desperation in trying to keep the business alive so that it will provide me an income and trying to find working capital funding for the business.

I’ve had outstanding credit throughout (739 score), but I’m really concerned with all the inquiry hits and heavy credit card debt that I’m amassing while I try to find business credit. I’m not sure where to go from here, but if the business goes down in flames, so will the nearly $300,000 of life savings that I put into it and trying to ride out the “no income” period. Is there any hope to find investment funds or credit to keep the business afloat? Pat

ADear Pat,
I love you entrepreneurs. You’ve got guts. While you can lose your shirt (and pants and shoes … ), you can also make a mint. More, if your business is successful, you’ve earned the right to wear the coveted “I did it myself” medal of honor.

However, I’m sad to say that many people come to me in the same terrible position as where you are now: they’ve sunk a vast amount of their hard-earned dollars into their dream, have little to show for it and are attempting to borrow their way out of deepening disaster. How many more months or years should one go limping on before collapsing?

Well, Pat, without knowing what kind of business you’re actually in (a gourmet hot dog stand? on the cusp of an inventing a new, clean source of energy that’s going to rock the world?), I must say that I’m not optimistic about your prospects with this particular venture. Descending into greater debt just doesn’t seem wise. I mean, you don’t even sound optimistic about it taking off. I don’t see how a lender or investor would have confidence.

Then again, I’m pretty conservative about borrowing to make ends meet. Figuring a small business authority might have a different take, I turned to one of the best: Charles Green, founder and executive director of the Atlanta-based nonprofit organization, the Small Business Finance Institute. I showed him your letter and asked for his perspective about whether you should pursue more funding or if it would be better to remove your shingle.

“My rule of thumb that is after 12 months if you haven’t begun building a profit, there is something wrong,” says Green. “You need to begin examining your revenue model. Are you really positioned to produce or is the market just not catching on?” As for taking out more loans, he points to the $300,000 you’ve already invested and essentially lost. “That’s a lot of money to run through in nine months. For whatever reason, people are not responding to your big idea. It’s going to be virtually impossible to get funding at a decent rate.”

So it looks like Green and I share the same advice after all: If your prospects for raising this sinking ship quickly aren’t great, borrowing more money will only intensify your problems. You want to maintain your positive credit rating (assuming it still is — I’d check if I were you), but being at or close to your limits will drive your scores down. Also, I rarely recommend using plastic to fund a personal business. Credit cards are payment instruments, not small business loans.

What now? If your company doesn’t become profitable within a few months, get a job. You say you were unemployed for a while, but maybe you were focusing on a depressed industry or one that’s not right for you. Expand. Find something in a new field that will provide an income that you can live on with cash to spare. Save and rebuild. You can always try to start a business of your own again later.