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2010elbodo
03-14-2010, 11:54 PM
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
03-15-2010, 12:15 AM
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
03-15-2010, 05:30 AM
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
03-15-2010, 09:49 AM
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
03-15-2010, 01:47 PM
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
03-15-2010, 06:54 PM
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
03-15-2010, 07:52 PM
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
03-15-2010, 09:14 PM
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
03-15-2010, 10:52 PM
...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
03-15-2010, 11:38 PM
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

;-))))

billbenson
03-16-2010, 12:11 AM
You can do what you are talking about. Banks won't negotiate on that is owed. The collection agencies will tell you to quit paying your bills. Then the banks will sell the debt off to collection agencies. Companies out there will negociate with the collection agencies on your behalf. You will end up paying 20% on the dollar.

Here's the downside. As you start maxing out your cards, banks will see your cards are at a high percentage of your available credit and drop your available credit. They will also increase the interest rate on your cards. Obamas new credit card law may help on this. When you default on your cards, it will destroy your credit rating worse than bankruptcy. I think you will be lucky to use 40k of that 70k you think you have before the banks knock your credit down unless you do it all within a month or twol

When your credit rating goes down the dumper, your suppliers will never give you payment terms. Most good suppliers give net 30 or better terms to good customers. You will be a risky customer. You won't get the discounts from them and your terms will be cash in advance.

You will destroy your credit for about 10 years. That means you will have to buy houses, cars, groceries, everything in cash. I doubt incorporating will help you either as you are really just a sole proprietor.

Your business plan has a real good shot at destroying your career and other opportunities that may come along.

Steve B
03-16-2010, 05:36 AM
billbenson said it quite qell above.

I'm not sure I understand most of your logic. What little of it I understood sounds quite crazy to me. For example, how exactly is lowering your credit score by 150 to 200 points not considered damaging your credit?

Steve B
03-16-2010, 05:40 AM
Part of the reason I didn't understand your logic is because of your abbreviations. It's been over 20 years since I went to college - could you please decode for me? I'm guessing I'm not the only one that doesn't know all these terms.

fcst -
opex -
YoY -
HC scaling
APR - (I actually remember this one!)
SUV
M1
M2

2010elbodo
03-16-2010, 09:34 AM
>You can do what you are talking about. Banks won't negotiate on that is owed. The collection agencies will tell you to quit paying your bills. Then the banks will sell the debt off to >collection agencies. Companies out there will negociate with the collection agencies on your behalf. You will end up paying 20% on the dollar.


That’s exactly how it works … sick is not it ?


>Here's the downside. As you start maxing out your cards, banks will see your cards are at a high percentage of your available credit and drop your available credit. They will also
>increase the interest rate on your cards.

No. you assuming I will be buying $80K worth of inventory over extended period of time which is not the case. To fill up a liquor store and keep customers who come to you, you need to have all popular brands and kinds of alcohol …which means .. those $80K will be spent with a liquor distributor during one phone call. For your plan to work banks who issue credit cards would need to look up my credit history every 2 weeks to track the increase in balance. Even in that case it will not work as it takes time for Experian, Transunion or Equifax to update their databases with your most up to date information….


>Obamas new credit card law may help on this.

Let’s stick to reality pls

>When you default on your cards, it will destroy your credit rating worse than bankruptcy. I think you will be lucky to use 40k of that 70k you think you have before the banks knock
>your credit down unless you do it all within a month or two

Bingo ..one phone call


>When your credit rating goes down the dumper, your suppliers will never give you payment terms. Most good suppliers give net 30 or better terms to good customers. You will be a >risky customer. You won't get the discounts from them and your terms will be cash in advance.

Ok, here is the deal. Let’s consider LLC liquor store not the person who orchestrated all that. This is how the supplier sees it.
A guy set up a store, operates for 5 months with no problems, buys with cash on average 30K per month…now he wants credit. Hmmm…ok ..does he have a store in good location – check. Does he have a good history WITH US – check, does he pay on time – check…ok let me approve it before that good customer will move to competition…


>You will destroy your credit for about 10 years. That means you will have to buy houses, cars, groceries, everything in cash. I doubt incorporating will help you either as you are >really just a sole proprietor.

No. Again. Greed of credit institution will help me to rebuild it. True story: a guy filed for bankruptcy and 4 months later he started receiving credit cards offers …again system is greedy and sick…what can you do

>Your business plan has a real good shot at destroying your career and other opportunities that may come along.

they never come along unless you do something...

So net/net: I am just pinpointing that it is possible to do it and if you manage your business the right way..it should work out..obviously it is at the very bottom of my financing options but let’s treat this thread as a brainstorming exercise….I love poking holes in scare tactics ;-))

2010elbodo
03-16-2010, 09:40 AM
Part of the reason I didn't understand your logic is because of your abbreviations. It's been over 20 years since I went to college - could you please decode for me? I'm guessing I'm not the only one that doesn't know all these terms.

fcst -
opex -
YoY -
HC scaling
APR - (I actually remember this one!)
SUV
M1
M2

will be more than happy to explain. Those abbreviations are very familiar to anybody who spent a couple of weeks in FPA (financial planning and analysis) division of any fortune 500 company


fcst – forecast – any business plan needs to include forecast of any PnL line item you include
opex – operating expenses – every penny you spend on operation that is not included in COGS, taxes, etc …COGS would be ? ;-)
YoY – Year on year growth ..revenue, costs anything ..a measure ;-)
HC scaling – headcount scaling – exercise that helps you to find out how much headcount (employee size) is optimal for the revenue you generate
APR - (I actually remember this one!)…you remember this from college ?
SUV – not sure about this one ;-)
M1 - month1 of operation etc

billbenson
03-16-2010, 02:26 PM
>You will destroy your credit for about 10 years. That means you will have to buy houses, cars, groceries, everything in cash. I doubt incorporating will help you either as you are >really just a sole proprietor.

No. Again. Greed of credit institution will help me to rebuild it. True story: a guy filed for bankruptcy and 4 months later he started receiving credit cards offers …again system is greedy and sick…what can you do

I'm not sure that an LLC will help you keep from destroying your business credit or not. There are others here that can better answer that one.

As far as the new credit card offers, you will have to have several years of secured credit cards before anyone will touch you with real credit cards. I filed bankruptch in 2002. It took at least 5 years to get a decent credit card. Back then, you wanted to maintain credit cards at about 50% of your credit limit on that card to improve your credit. You don't want to pay it off, just pay enough to keep it there. Today, with all the banking problems, they want to see you with about 10% to 20% of the card limits.

I have about 5 credit cards max'd out. That keeps my credit score at least 100 points lower than it would if they were at 10%. A default on all your cards would be much worse and stay with you longer than bankruptcy according to my bank.

I got in my position because I lost my career in the 99 dot com crash. Lived on credit cards while I built a business. It wasn't planned.

If these are personal cards, you will destroy your credit for a LONG time. It may be fraud as well if they could prove it.

Business Attorney
03-16-2010, 03:12 PM
It may be fraud as well if they could prove it.

Incurring liabilities with the intent not to pay them when they come due IS fraud. There is no "may be" about it.

Whether someone can prove intent is another story, though if someone can trace your I.P. address to this thread, that would be pretty strong evidence of fraudulent intent.

billbenson
03-16-2010, 04:17 PM
I suspected that was fraud David. Hopefully Evan will come by and answer the question as to whether doing this as an LLC will affect his business credit with his suppliers when his personal credit gets trashed?

Steve B
03-16-2010, 04:59 PM
So how is lowering your credit score by 150 to 200 points not considered damaging your credit?

Blessed
03-16-2010, 10:50 PM
a few other tidbits that you might find interesting in your whole scenario... yes - when you consolidate you might only pay 40 or 50 cents on the dollar, but you might only be able to negotiated down to 70 or 75 cents on the dollar. Also - all of that borrowed money that you default on will have to be claimed as income on that year's income tax return. So say you do this in 2010, you default at the end of the year and by December 31st you have $40k in "forgiven" debt - you just increased your income by $40k dollars. You will get a 1099 on that amount.

Been there, done that - per Bill's story - it wasn't intentional and it was simply personal debt, how we made it by for a time. Very stressful, don't ever want to go there again - now we owe my grandmother a bit of money and about $60k on our house - no other debt at all - it's the way I like it.

For the record - I do think this idea is highly unethical and while it might work and you might just get by with it, you have to go into it with the full knowledge that it just might backfire on you - then how do you plan to pay back that $80k at 20% interest? Or is that when you hope to file for bankruptcy?

Dan Furman
03-17-2010, 12:10 AM
I love poking holes in scare tactics ;-))

No scare tactic here, and personally, I'm all for taking out the CC's to finance the biz.

But, to go in with the idea that you can get over on the CC companies because it's legal... that I think is the wrong way to go into business. It's one thing to go into it and do it the right way (pay the money back), it's another to plan to screw someone/some company because it is legal to do so.

I'm a believer in risk. I am also a believer in reasonably protecting yourself. But mostly, I am a believer in doing the right thing. It doesn't seem like you fully believe in that last part very much - to you, the right thing (seemingly) is trumped by what you can legally get away with. In my opinion, in the long run, that's a terrible business mindset.

It sounds like you are going to finance your business on dishonest pretenses. That's just a bad way to start. I hope you don't go down that road.

But, best of luck in whatever you decide.

huggytree
03-17-2010, 09:27 PM
ive never heard of anyone starting a business with financing idea's like this.

sounds like your making assumptions on how well your business will do also...i thought it would be easy too....3+ years later and i still have to fight for every customer....it was never as easy as i thought....i would plan for the worst....your best plan sounds like something that most people would consider beyond their worst idea.....

Most people drink the booz what comes from Walmart..beer,etc....do small liquor stores even make sense anymore? (i drink 2 beers a year or less)....when i buy beer for a party i get it at the food store...i dont know why you'd make a special trip?.....

whats your unique idea thats going to make you successful? without a special idea you will struggle more...

billbenson
03-17-2010, 09:50 PM
Ya, but that is for regular beer, Huggy. People still drink expensive wines, and liquor. You can't get that at Walmart. Husband wife liquor store near me is doing fine through the recession. I talk to the owners about business from time to time. The DUI laws affect things as well. I know people who quit drinking wine out with dinner or an after dinner drink. They buy it and drink it when they get home because they don't want a DUI.

Dan Furman
03-17-2010, 10:58 PM
Most people drink the booz what comes from Walmart..beer,etc....do small liquor stores even make sense anymore? (i drink 2 beers a year or less)....when i buy beer for a party i get it at the food store...i dont know why you'd make a special trip?.

Yes, they make a lot of sense. All kinds of wine and spirits cannot be had at Walmart. Want good scotch? You go to the liquor store. And yes, people are still buying good scotch, etc (the biggest mistake people make in marketing is putting their own personal taste into the equation.)

billbenson
03-19-2010, 11:29 PM
Bump

Curious what Evan has to say about how ruining your personal credit would affect a LLC owned by you?

UFOnaut
12-25-2010, 11:08 AM
First you must think positive and shine with positiviness at your customers and then all your problems will be solved. Because if you will be gloomy - customers feel this and won't to go to your store. Simple but, I think, useful advice

Reflo Ltd
12-29-2010, 03:28 PM
I know I am coming to this thread awfully late but UFOnaut brought it back to life and it's an interesting read.

Am I correct that the OP (original poster) intends to buy his stock via credit card and then intentioanlly default on the cards as a way to save money when he settles for a fraction of the debt with collection agencies? It sure reads that way to me but maybe I am missing something. Maybe that is just his backup plan if things go wrong in his business.

Also, the question was raised about an LLC being formed and being disassociated from the OPs credit rating. I think this is inaccurate. Most suppliers will ask an LLC with no credit history for a personal guarantee (ie, the credit of the members of the LLC). Also, I do not think an LLC or even a corporation offers complete immunity to a person when that peson controls all or a majority of the LLC or Corp.

gabearnold
01-03-2011, 01:59 AM
I've started all 5 of the businesses that I've opened with about $20 in my pocket. So I think I have something to contribute to your idea.

I have started all my businesses using good will, hard work, and determination. I've also lost a million dollars because I thought financing my future was a good idea. It' not.

Instead of racking of thousands in credit card debt, why don't you go out and meet with all your local liquor distributors and sell them on your idea. Find your local real estate guru and sell him on a piece of the action. Get some partners invested in the concept, and boot strap it. Find out what the needs of the liquor distributors are and find a way to meet them.

If you are creative and persistent you'll find that this approach does work. Maybe your business model (http://gabearnold.com/business-model-examination-day-twenty-six/) is good on paper, but it is NEVER a good idea to borrow what you can't afford. It's never a good idea to trick the partners that you'll need in the future. What you described is unethical and foolish. It sounds like you have the guts to go into business, so why not start of right.

I'd love to help you more with your concept, so let me know what you think of this approach. Just to give you an idea, I've grossed over 5 million dollars this way, so I know it works.

daveb
01-03-2011, 03:24 AM
For a variety of reasons its not always great to risk your personal credit and cash on a new business venture especially in today's economy. If I were you a would consider taking on a business partner / investor. I do commend you though because it does take a lot of guts and with no risk there is no reward. Either way I wish you the best of luck!