Home Sale Relief

John Herman’s blog, hermanisms.com, is a must-read especially for those of you who are like me, very entrepreneurial. Today, John replies to something I posted I think (I can’t remember anymore what I post) and it discusses his unique insites on secured versus unsecured debts.

Recently Richard made a comment about failing in a deal and it affecting future business prospects. While your ego and confidence are shaken and you have to get over some self doubt (true entrepreneurs don’t take long to do this) the truth is only one major impediment to future business can hold you back. Your ability to use credit.

I have been thinking a lot about business failure credit and bankruptcy.

I think that I have to agree with John here. But I will say, before reading further, that I think the major impediment to your future business is more imagination than lack of credit. I have seen more people fail because they think they have a money problem when I can recognize a specific problem with their business model, or with their operations. It is all too easy to blame credit access for your problems instead of doing the clear thinking that is so hard to do.

If sixty percent of all deals fail to make a profit then for sure, someone isn’t getting paid for all their goods or services along the way. When I owned a restaurant (named Baltimore’s Best!) we had a rule to manage cash. We paid for every order in cash when it arrived. We never created a hole of debt with vendors. They called and faxed credit applications and wondered why we would always insist that the driver wait to be paid before just dropping an order and running off to his next stop. Two things happened. One, we got the best fish and meat the vendor had, because since we were paying cash up front if he gave us inferior product we went elsewhere and we were a “gold” customer to vendors, they would never lose a dime with us. Two, we actually bargained for lower prices. These vendors were used to restaurants running up bills for thousands of dollars and then closing without paying. High profits were built into sales for them to avoid the coming losses when the restaurant failed. They “managed the credit” of restaurants based on how much they ordered and how long it took to get paid. And who do you think got the worst fish and meat? This debt is unsecured debt.

John gives us an amazing lesson. He shows that with cash, you can get better quality and pay less than with credit. Today, it seems few of us understand the difference. My son has a lot of cash, according to his view on life, because he has access to credit cards he can borrow on.

I think the day will come again, when a more conventional view of cash will prevail: money in the bank.

Few people today have a lot of cash. It’s all tied up in 401(k)s and retirement accounts. Most businesses are cash strapped and the owners take surplus out in the form of retirement payouts to avoid or shelter taxes. The result is that we are all short of real, honest to goodness cash.

So we must borrow one way or another. We can borrow from our customers (something that occurs to few of us), or borrow from a bank or from a private investor.

Borrow money from the bank to buy a business or use against inventory and accounts receivable and that debt will be secured. If you are incorporated you will still probably have to guarantee the payment. Close your business down for a failure and the unsecured guys get screwed. But that is by the corporation, not by you personally. Secured debt is different.

Pay all secured debt or that will follow you until it is resolved. Secured debt is usually managed by the bank so that if you fail, the sale of assets will cover the secured debt. If you fudge inventory or AR’s and fail and come up short, bye-bye future credit until you pay that banker. Taxes follow you forever too, so pay Uncle Sam and the bank at all times. The system is rigged against the unsecured creditors. Besides the equity owner losing it all, they are almost always losers too. But if your corporation signed for those things, and you didn’t guarantee them…it doesn’t affect your personal future credit history.

This may sound cold, but it is the reality of the game.

I am a big believer in not giving personal guarantees. I bought house after house without signing personally. I bought an apartment building without signing personally. I sleep better at night. My business is always done through a limited liability company or a corporation (but I prefer LLCs these days). And I have no secured debt.

I am going to encourage you to be creative here. It is just so easy to borrow more money instead of solving your business problems another way. I get email after email from poor people who are over stretched and are thinking the next loan may help them get by another month. What is sad is that they are saddled with loans to the point where they aren’t going to get out from under ever unless they get a firmer understanding of how the game is played.

And it’s like this. If you are the chairman of General Motors, GM’s debt is not your debt. Those are GM’s debts.

If you start thinking the same way, two things happen. You begin getting a clearer idea of what your options are. And you de-personalize so you stop blaming yourself. Solutions become apparent, solutions beyond just making next month’s payment.

Read all about it at my www.MortgageReliefFormula.com blog  and get instant access to my 25 page insider’s guide to stopping foreclosure, slashing debts without bankruptcy, and improving your credit rating in the process. Start thinking like GM and less like Joe and Jane Doe who continually get shafted by the banks and the tax guy.