XBanker

In Credit Crunch, Business Comes First

September 8th, 2008

Business owners are electing to pay business debts at the expense of personal debts, reports Experian(tm). In a comprehensive study covering 2.7 million business owners over the course of a year, the global information services company found that found that business owners with a severe mortgage delinquency were more likely to pay their business obligations instead of their mortgage.

Experian’s research showed that because of deteriorating equity, high mortgage payments and limited refinancing options, business owners chose to ensure the business’ survival, preserving their source of income at the risk of losing their home. That’s the bad news.

Here’s the good news:

Business owners were less likely to experience a 90+ day delinquency on their mortgage than other consumers. In fact, by April 2008, the average home owner was 1.5 times more likely to experience severe mortgage delinquency than the average business owner

Additionally, Experian’s study found that small-business owners are relying on commercial lending options more often than personal financing options, to support their businesses. We think that’s smart business and it may very well allow the business owner to keep their business even if they have to start over personally.

But of course, the downside is that business owners’ personal credit can impact their business financing. Experian, which sells a credit score that blends the business owner’s credit with the credit of the business, points out that consumer scores work great for assessing consumer risk, but their blended score performs nearly twice as well as a consumer score for assessing business risk.

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Save Your Business in Bankruptcy

August 11th, 2008

My Xbanker colleague Garrett Sutton has written extensively on the value of incorporating a small business, and here’s another reason to do so:

Incorporating can literally save your business.

I doubt many sole proprietors realize that filing for personal bankruptcy (due to medical debts, divorce or many of the other reasons people file) could mean the end of their business.

I didn’t.

But in a recent post on the Bankruptcy Law Network, California bankruptcy attorney Cathy Moran describes a recent case in which a couple who owned a business as a sole proprietorship were in danger of losing it – even though it was doing just fine – because they had to file for personal bankruptcy due to real estate investment debts.

She points out that:

…(the) business was a sole proprietorship. If we filed Chapter 7 now, Chapter 7 trustee’s first reaction to a going business is to shut it down. The trustee is concerned about his liability for regular business debts the operation may incur and the possibility that a customer may be hurt on the premises. The trustee wants to preserve the status quo by shutting the doors, even if there is nothing in the business that he can sell for the benefit of creditors.”

In this case, she was able to incorporate the business to save it.

But as another California bankruptcy attorney Douglas Jacobs points out in another post, waiting until you are contemplating bankruptcy to incorporate your business is risky business. It can be considered a “fraudulent conveyance” and can backfire.

If you haven’t been convinced yet that you need to incorporate, what else can I do to convince you that you need to check it out? It may literally save your business.

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Small Business Owners On the Frontlines of Credit Crunch

June 16th, 2008

While the sagging housing market has been garnering most of the attention lately, the challenges small business owners face should not be overlooked.

The credit crunch is only likely to get worse, predicts economist Joseph E. Stiglitz in a recent article in Inc. magazine titled, Raising prices amid a sputtering economy? We’ve been here before. Here’s how businesses should prepare. (June, 2008 pp. 75-76). He also warns that “…small businesses are likely to feel the pinch the most.”

“Credit availability appears to be erratic,” says Stiglitz. If you are looking to for VC money or a bank loan, that may well be the case, as The XBanker recently pointed out in his advice for getting cash fast. On the other hand, many vendors are eager to keep selling their goods and services, and may be willing to negotiate even better terms than before, especially if you can demonstrate that you’re a good credit risk.

Take action now to prepare for the worst — and the best. Things will turn around again, and when they do, your business may look very different than it does right now. If you are doing the same thing you’ve always done, don’t be surprised when that strategy no longer works. On the other hand, there may never be a better time for your business to grow.

“Stagflationary times are complicated,” warns the economist. But business owners encounter challenges all the time.

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Are You Entering The Danger Zone?

June 13th, 2008

Sales are up…things look good, right?

Wrong! warns Jerry Mills CPA in his terrific book, The Danger Zone: Lost in the Growth Transition which I read on a flight to San Francisco last week. I had met Jerry a couple of weeks earlier at a conference in Baltimore, and would be seeing him again, so I knew it was time to learn more about his business.

The Danger Zone proved to be a deceptively easy read (Jerry tells me his second book is even better). I say “deceptive” because the writing style and content kept me engaged throughout the whole book. No CPA-style knuckle-wrapping here. Just solid insight and advice. But the advice he shares should not to be taken lightly. Ignore it, and your business may crash and burn like so many others have.

Read the rest of this entry »

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