There’s one issue that comes up from time to time when I’m talking with small business owners: funding debt with debt. They find themselves in a situation where they are either growing too fast or having a slow spell, and they max out credit cards or lines of credit and need money in a hurry. Sometimes they agree to a short-term loan or some type of financing and don’t read the fine print or understand what will happen after they get the money. Sometimes the money they get is enough to get them through the rough spot, they pay the money back, and everything works out great…
But sometimes they were so desperate to get money that they didn’t figure whether the money would be enough to save them. Sometimes they don’t realize that the lender will draft their bank account whether or not they’re ready to pay the bill. Sometimes they don’t know (or didn’t pay attention) that if they violate a term of the agreement, the drafts can escalate, the whole amount may become due, or their accounts can be cut off.
When these things happen, the entrepreneur may seek help in finding more financing. It breaks my heart, but I have to tell them that even if a lender would give them more money, there is absolutely no situation where they can survive the downward spiral of paying off debt by getting more debt. Without a solid plan for how they can repay the debt (the old debt or the new debt), they are not going to make it.
There are sometimes ways to downsize, change direction, streamline, or do something else to become healthier and get out from under the debt. The first step, however, is for the business owner to realize that things have to drastically change and then be willing to make those hard changes. How do they avoid this situation: Don’t agree to or apply for any type of financing without calculating how it will work (and if it will be enough) and affect revenue, costs, and operations. Don’t sign anything without completely reading it (and letting your attorney read it if you have questions) and understanding what will happen if something goes wrong. More importantly, only seek financing for the purpose so making money, not paying someone else back.
(Source: Alisa Kirk, Area Director, UGA SBDC in Morrow)