Desparate to Open Liquor store ...what If I go broke?

[2010elbodo]

I plan to open up a small liquor store. I intend to finance the inventory using my personal credit cards (about 12), total limit about $80K. Then I plan to refinance, consolidate the debt and manage it thru 1 payment. At this point of time I do not have other possibilities to finance my business (SBA turned me down, no equity in my house etc). What would happen if my business would not allow for the credit repayment, and I fell behind…and at some point stopped repaying. Would credit card companies (or the institution I refinanced with) be able to grab my house or force me to sell my business or sue me ?The market value of the house is about 280K and I have 235K left to repay (equity loan not possible in TX unless you own more than 80%). I realize that my credit would be destroyed. Just want to make sure I know enough before I open up my business – thanks for your help

[Patrysha]

What I would say would depend on why the SBA turned you down...at least as far as whether you should even go for it...

I am not familiar with law and finances and such so I have no idea what consequences there would be in using personal credit through credit cards if you failed...

But I do think if you are already thinking of failing then you have a lot of work to do before you should even be thinking of opening the doors of any business. You should be starting out with a more than reasonable expectation of success based on solid planning including marketing, publicity and other forecasts (staffing, display, sales goals etc...)

[Steve B]

It's sounds like you're taking an incredible amount of risk - with nothing to fall back on. I would suggest you get your finances in order - including a savings account that will carry you for at least 18 months while your business contributes little or nothing to your income.

The SBA doesn't give loans. The banks give the loans - the SBA provides a bit of insurance to the banks (unless things have changed in the last few years).

Have you gone throught the steps of a formal business plan? This may be a good first step to help you determine if you really want to take this risk.

[Spider]

I plan to open up a small liquor store. I intend to finance the inventory using my personal credit cards (about 12), total limit about $80K. ...

First of all, I commend you for your opening remarks - "I plan to open..." is really quite positive especially when followed with, "I intend to finance..." This is much more certain than the usual, "I want to," "I hope to.." and other wishy-washy statements would-be business owners often make.

I recommend you drop the "small" as in small liquor store. I have found so often that people who start off with the idea of a small anything usually get stuck at "small." Why not make your goal a large liquor store, beginning with a small one; or a chain of liquor stores beginning with one.

In addition to commending you for your positive attitude, I also note your action in investigating all possible outcomes to your chosen path. That is a very wise move and one, incidentally, too few entrepreneurs take when flushed with the excitement of starting a new business.

Well done. I wish you well.

Regarding the question you asked, though -- "Would credit card companies (or the institution I refinanced with) be able to grab my house or force me to sell my business.." -- Credit cards are unsecured loans, so it is my understanding that a credit card issuing bank could not force you to sell anything to repay the loan. Any other insitution from whom you borrowed may be able to force a sale but that would depend entirely on the terms of the loan.

[Dan Furman]

Quick answer: no... the cc companies can't take your home or business. It's no different if you ran up the balance by buying inventory (etc), or buying groceries, DVD's and went on vacation.

People will tell you this is risky. But that's part of it.

[2010elbodo]

thanks a lot for that info. Yes I have it all done financial fcst, opex breakdown, business plan that assumes YoY growth, marketing plan and HC scaling etc. I was not sure whether I could max out my credit cards and risking my credit reputation to finance my business this way. it is risky ..but once I refinance and have one lower payment over extended period of time I should be able to handle it ...I will read some more about it - thanks you all!

for example ..current state :
10 credit cards ..$7K credit on each ...20% average APR...do you think it would be possible to refinance to (assuming I maxed them for $70K) 100K over say 10yrs for 10% p.a. ?...if so ..$900 payment a month aint that bad ....

[huggytree]

remember most businesses fail..odds are you will too...keep that in mind

im a big believer in having a huge amount of $ to fall back on...your supposed to have enough saved to live on for a year....i wouldnt like paying 18% on $80,000 from day one.....what if it takes 6 months to break even? what if it takes a year?....its not realistic to assume you will break even or make profit in the first few months...it could happen, but typically doesnt....

if you dont have 6 months salary saved up i wouldnt do anything...id wait, plan and save.....

whats your unique idea for your store that will drive customers to buy from you instead of Walmarts liquor store? you probably wont beat their price....are you more convenient? more hip and trendy? specialize in something different?

[2010elbodo]

I sense a lot of negativism ;-))
Very good points … allow me to retort ;-)


1. I am intending to do business with borrowed money not my own money, which means I still have my savings that will allow me to leave comfortably not for 6 months but for a year if I need to…
2. Who said anything about 18% on 80K. yes maybe for 6 months to show good faith to credit card companies then I consolidate my debt with any of the debt consolidation companies out there and settle for $1300 a month for 4yrs ..which makes $62K…why ? cause they negotiated the debt down to $40K….that’s what they do..and since there is no way credit card companies can get anything from me, my business or my house ..their only option to get anything back is to talk with the debt consolidators…
3. ….This will allow me 3-4 month of no payments .. enough to build up a client base and cover fixed expenses before loan installment kick in
4. Good luck going to walmart and buying Smirnoff vodka or Jack Daniels….walmart got beer and wine selection not hard liquor …if they had, all liquor stores would die ..as simple as that …
5. Liquor stores needs to be in good location, have broad choice of merchandise, convenience..and it will work out ..it is not a rocket science …all you have to do is listen to your customers..be nice and always have what they need …
But first and foremost ..spend 3-4 months dissecting the whole operation piece by piece by piece … which I am doing right now ..

[Spider]

...then I consolidate my debt with any of the debt consolidation companies out there and settle for $1300 a month for 4yrs ..which makes $62K…why ? cause they negotiated the debt down to $40K….that’s what they do..and since there is no way credit card companies can get anything from me, my business or my house ..their only option to get anything back is to talk with the debt consolidators…

Apart from the fact that I find this "plan" quite unethical, I don't think you are setting yourself up very well.

1. Even if the banks agree, consolidating your debt by having creditors "forgiving" part of the debt damages your credit, leaving you with difficulty in securing further financing. It looks to me like you will be able to sell the stock you aquire in this fashion but will be forced to re-stock with cash up front, because who will finance your re-stocking and run the risk of being cheated again?

2. A default in this manner will likely affect all other credit you have and could even result in a penalty interest rate being applied on all other loans in existence and in the future. It will depend on the terms of your mortgage whether you will be stuck with a penalty interest there, too.

Honesty is the best policy.

[2010elbodo]

I could be short and reply : do not hate the player hate the game…just because I laid down the sick fundamentals of the “system” that got us all in trouble, does not mean I will exploit it…

This is one of the options I might consider. It is reckless, takes a lot of discipline and courage but is doable…and in the light of the law totally legal.

Back to your points:

1. My credit will not be damaged, but 150-200 points lower. So from 750 I will land at 550..at the most .. weak but not terrible - this is how debt consolidation usually affects your credit score....
2. inventory in a good liquor store rotates 5 to 7 times a year …which means ~ every 2 months at best. Good luck with 60 day trade credit. Suppliers will give you 14 maybe 30 days …so it is useless... Trade credit just like SUV gives you false sense of security …if you business is economically viable …pay cash …and you will know whether you make money or not ..there will be no surprises at the end of the month. If you sold 30K in M1 make sure to set aside 30K*0.75 for M2 purchases to bring ur inventory to 100K level..as simple as that and u never go broke ..…of course now you can paste all that business school bs about time value of money, rule of deferring payments and using vendor’s financing …yes it all applies to multimillion $ organizations ..not to $500K a year in revenue liquor store
3. So you are saying that if my credit decreases all of a sudden bank I have a mortgage with will panelize me with higher payments or some “bad credit” fees ...and fixed 30yr mortgage statement will show :

- naughty, naghty penalty - $40

;-))))