October 1, 2011

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Article

In Up to Your Neck

Avoid the Debt Trap and Protect Personal Assets

Tom Haraldsen

October 1, 2011

Sometimes, good news comes from bad news. Such is the case when discussing recent small business bankruptcies in the United States.

According to the American Bankruptcy Institute (ABI), the number of small businesses declaring bankruptcy in 2010 was down 12 percent from totals in 2009. Of course 2009 marked the highest numbers in 15 previous years. The ABI attributed last year’s decline, in part, to entrepreneurs being both more frugal and wiser with their money.

Almost anyone who starts a new business realizes that debt is inevitable—you have to spend money to make money, the old axiom goes. Those who’ve started down that road have learned, sometimes the hard way, that racking up debt on multiple credit cards or through second mortgages can set the stage for a long, hard fall if businesses are slow to catch on or fail.

There are strategies that can help.

“In my opinion, no debt is best,” says Kevin Olson, a Bountiful businessman who, along with this brother Chad, started the Pro Image chain of licensed sports product stores in the ‘80s. “Very few new business owners can realistically start that way, but it’s a good goal. What you can do is to really do your homework, to be as sure as you can that your venture will pay off. Of course, that’s often easier said that done.”

In Olson’s case, his love of sports, coupled with the fact that in the ‘80s, clothing and memorabilia from pro sports teams was sold exclusively in ballparks and arenas where those teams played, led him to an easy conclusion: make that product available in markets like Salt Lake City, where there were no MLB or NFL teams, and fans would find it. They did, and Pro Image grew in less than eight years into a chain of nearly 250 stores nationwide before the Olsons sold the business and began developing other interests.

“I guess we benefitted from doing a small market test here in Utah, taking the baby steps first and not putting all of our eggs in one basket,” he recalls. “But eventually, we did have to take out second mortgages to keep our cash flow steady, something I probably would advise against if possible.”

Plan for Success

Olson says that any entrepreneur thinking of starting their own business should first find an accountant and a lawyer to help formulate a business and financial plan. Most of these professionals have simple, standard formulas for new business owners.

First, cut unnecessary costs and free up cash. Look at the parts of a business startup that might incur the most debt and address them directly. Next, revisit the budget and/or proforma you may have created. Then prioritize your debt payments and make sure your business revenues can cover at least the costs of doing business on a daily basis.

“Pay as you go,” is Olson’s recommendation once the initial investment has a business going forward. “Make sure your company is guaranteeing the loan and not you personally. Many business lenders will work with you as you set up a company in a way that protects you from personal guarantees.”

Another recommendation is to consolidate loans, particularly if some of that startup cash is on high-interest credit cards (a very common and easy way for a business owner to start). A reduced, condensed monthly payment has a number of advantages over dealing with multiple creditors.

Financing can also come from a typical bank loan, a Small Business Administration-backed bank loan (through a bank you choose to do business with), supplier cash if you are working with a major supplier that has a vested interest in helping you get its product to market, borrowing against your home or 401(k) plans if done wisely, and even selling stock or gaining investment partners from friends or relatives.

“Whatever route an entrepreneur takes, the key is to do everything in their power to make that business work,” says Olson, who now serves as a small business consultant and has a blog at www.wanttobeanentrepreneur.blogspot.com.

“I remember my first banker giving me a loan and saying, ‘Kevin, in a year, I’m taking your house if you aren’t paying on time.’ Certainly that scared me and gave me pause to think about what I was doing. But there’s a time when you have to take that leap of faith. If you do it with your eyes wide open and your business plan firmly in place, it can offer great rewards.”

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