Debt consolidation may not cure cash flow problems for business
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Dear Your Business Credit,
My husband and I opened a business about a year-and-a-half ago. We used personal credit cards to cover a lot of startup costs (gym equipment, leaseholder improvements). We are close to the limit on our two credit cards, and I'm looking at consolidating those two cards into a personal loan, which comes at about 3.5 percentage points lower than the cards' interest, and a payment plan to pay off the balance in five years. Is this a smart move? -- Jennifer
You're smart to nip this situation in the bud now. Media articles are full of stories of entrepreneurs who maxed out their credit cards to start a successful business, but in my experience that scenario doesn't work out well for most entrepreneurs. If you're relying heavily on credit to start a business, that usually means you're undercapitalized -- and that is a common reason for business failure.
Fortunately, you've already made paying down this debt your priority. That's a very positive step in the right direction.
Given that you have maxed out your credit cards, you may not be able to qualify for the advertised rate on the loan, so I would ask the lender if it depends on your credit score. Your overall credit utilization may be high, which could be hurting your credit profiles.
Plus, without seeing the loan agreement you are considering signing, I don't know if the deal is actually any better than what your credit cards offer now. If you're thinking of borrowing through a bank or a peer-to-peer lender such as Prosper, the terms should be pretty clear. However, there are many online loans now being marketed to small-business owners that look like they offer low rates, because of how those rates are expressed. When you dig a little deeper, though, the rates are actually much higher than what you would pay on a credit card. For more on the subject, see "7 tips for using online alternative business lenders."
Before you agree to any debt consolidation loan, I would recommend you ask an accountant to look over the terms so you are 100 percent certain you know what you will be paying. You may be reluctant to spring for advice at a time when you’re pinched for cash, but this could save you thousands of dollars.
Refinancing your loan isn't your most pressing problem. What you are suffering from is a cash flow crunch. You need to figure out how to increase the cash you have on hand, so you are not relying on credit cards to keep the business afloat. It appears that you run a gym so one way might be to run a sale on memberships immediately to get new members in the door.
Given that you and your husband are both involved in the business, I would also recommend that one or both of you take on some work outside of the business to give you more of a cash cushion. For instance, perhaps you can take on personal training clients who will pay you a generous rate. Juggling part-time work with running a business can be hard to do energy-wise, but it will help you avoid something that can suck the life out of any entrepreneur: unpayable debt.
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