Card credit debt managing

Feel as if you're living on borrowed time? Take control of your business loans before you get burned

YOU'RE RUNNING through a forest, darting feverishly around low-hanging branches. They're right behind you. It's the posse of loan officers from your bank.

Does this sort of 3 A.M. nightmare seem familiar? If it does, you need a better strategy for managing your debt. While borrowing may be the ticket to fast growth for your business, it can also keep you tossing and turning at night if you're struggling to make payments on the principal. The time for developing your debt-management strategy, most experts agree, is before you borrow. Ask yourself the following questions before you assume any debt. If your answers jibe with our experts' advice, you'll sleep soundly.

EXACTLY HOW WILL THE BORROWED FUNDS HELP ME MAKE MORE MONEY?

Be sure they will pay for something that will directly benefit your bottom line. "It's very tough for small-business owners to separate needs from wants," says Ed Slott, principal of accounting firm E. Slott & Co. and author of Your Tax Questions Answered 1998 (Plymouth Press, 1998). "If you're borrowing because you'd like a nice office chair or a $10,000 desk, you're borrowing for the wrong reasons, because none of that is going to create income."

On the other hand, borrowing to increase your employees' level of efficiency is certainly justifiable, as long as the return on the investment is expected to be higher than the cost of the debt. If you're looking at investing in computer-networking technology, for example, so that employees can share information, figure out how much the absence of the technology costs in terms of lost time and inefficiency, suggests Alice Bredin, author, consultant, and small-business adviser on the American Express Small Business Exchange. Base this calculation on hourly salaries. Next, estimate the revenue that could be generated in the amount of time that you're losing because of inefficient operations.

Todd Hendricks, cofounder and general partner of Franconia, Pa.-based T. H. Properties, borrows a considerable sum -- between $4 million and $8 million -- every four to six weeks to pay for the lots on which his company builds new homes as well as for the actual construction costs. But these loans, taken for about 18 months, are kept completely separate from other lines of credit put toward other internal costs, such as the purchase of supplies. And he borrows money for a new project only when he is 99 percent certain that the house will be sold at the planned price. "We want to see a return on our equity, and that's the bottom line," he says.

WILL IT HURT THE BUSINESS IF I DON'T PUT MONEY INTO IT?

If investing in a project won't result directly in additional sales or revenue, you can still justify borrowing the funds if the company's image is at stake. "If your competitors are all offering 24-hour turnarounds, or everyone's offering Saturday and Sunday service but you won't be able to do it unless you have an infusion of capital," says Bredin, then the debt is justified. Or, if all your clients are asking for your Web-site address, you may have to create a site to maintain credibility and market share.

IS MY INCOME STREAM STEADY?

If your cash flow has suddenly become unpredictable -- if you lose a major client or your industry hits a recession -- and you're not certain you'll have the money to continue paying back the debt, then it's a bad time to borrow, says Bredin. Granted, the cash infusion will look very appealing, but you must resist the lure of such "easy money," notes Slott. "When you have bills to pay, when people are calling you up complaining, it's very hard to stay disciplined." And if you do try for a loan while you're in a panic, you won't have the time to negotiate the deal that's best for your needs.

HAVE I TRIED OTHER AVENUES?

Consider carefully whether you might be able to avoid borrowing by cranking up sales activity, suggests Bredin. If you're selling big-ticket items, one extra sale may make the difference. Also, find out whether your receivables are up-to-date. If they aren't, there is certainly no reason for you to go into hock just because your customers haven't managed their accounts well. "Don't be afraid to be a nag," says Steve Rhode, president and cofounder of Rockville, Md.-based Debt Counselors of America (DCA). "If I were a small-business owner, I would hate to lose my business because I was too chicken to ask for the money."

And even if you have a sound reason for taking on debt, borrowing isn't without risks. If the interest you're paying is adding up more quickly than your revenue, get help fast. First, notify your banker, says Scott Harvey, VP and manager of the Small Business Administration loan department at Port Orchard, Wash.-based Kitsep Bank: "Be honest. Don't say what you think the banker wants to hear, because if you can't deliver and you break a promise, the chances of your getting any help at all are significantly diminished."

Another option is to contact Debt Counselors of America (800-680-3328), where a counselor will work with your creditors to create a more realistic payment plan and to reduce, if not eliminate, the interest. "Don't borrow any more money. You can't borrow your way out of debt," says Rhode. When is it a good time to ask for help? "I would say the first time you find that you're waiting until you have the money in the bank to send a check. That's a tip-off," he says.

To help you further in managing your debt, DCA will also advise you about where you could be saving more money and where you might be cutting back too much. "The worst thing you can do is get tight and just decide to cut back on advertising, for example," says Rhode. "If you don't advertise, you won't make any sales; if you don't make sales, you won't have a business."

RELATED ARTICLE: PLASTIC EXPLOSIVES

Why credit-card financing must be considered very carefully

Credit cards offer perhaps the most tempting form of debt available, particularly after your loan applications have been turned down by half a dozen banks. The interest on the balances, however, nearly always cancels out the income the funds produce. Whether the card is used to fund the company's opening, an expansion, or an individual client's project, the interest on the balance averages around 17 percent per year on new purchases and as high as 25 percent on cash advances, according to DCA statistics. Most often, says accountant Ed Slott, the optimistic small-business owner will take on credit-card debt hoping to pay off the balance in two or three months, once he or she generates enough sales. But if the sales don't come in as high as projected, the owner is lured into taking on more debt to pay off the old. "And that can be the beginning of the end."

As an alternative, talk with your banker about a loan or a line of credit that's guaranteed by the Small Business Administration (SBA). About 30 percent of SBA-guaranteed term loans -- offered for periods of up to 10 years -- are given to start-up companies that can demonstrate a good credit history and a decent cash-flow forecast. These loans are best for longer-term needs; if, for example, you are manufacturing a product that won't get to market for two years or you have to line up subcontractors, which could take time, you may need a loan to cover yourself while receivables are few. Lines of credit -- which the SBA offers through banks at rates of around prime plus two -- are best used for short-term working capital or to weather a temporary slump.

To determine which is better, a loan or a line of credit, you'll have to get a good handle on your business cycle. Those entering seasonal businesses, for example, should know when to expect a windfall and when things will be tight, and they should manage cash flow accordingly. Here is where your business plan -- a necessary document if you hope to have any chance of receiving a loan -- will support your rationale for your requesting cash.

If you have a temporary but immediate need for equipment or supplies, try getting materials on credit. You can often get a 30- to 60-day extension on payment; and if the companies do charge interest, you can be sure it will be less than what your credit-card issuer charges.

Should your business experience a downturn, think about expanding your product line rather than trying to skate by through assuming additional debt. Ask your existing client base what else they might buy from you if you offered it. "Most people are not tapping all the ways to sell parts of themselves," says Slott, who supplements his own accounting business with a newsletter about IRAs. "Anthony Robbins says that success comes from two things: inspiration and desperation. And that's true; that's when you either get creative or you die."

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