Financing Issues and Workouts

One of the most common causes for failure in a small business is a lack of capitalization. Businesses often start up with too little cash. Over time, this lack of money becomes amplified, and ultimately those businesses fail. The reason why they fail is not that they don’t have a good product, lack integrity in the marketplace, or fail to perform. They fail simply because they have run out of cash, in the middle of a normal learning curve in servicing the marketplace. Of course, loans can be helpful, but they do not replace a good business model, which allows for mistakes along the way and sufficient time to perfect your business approach.

Even without the luxury of borrowed funds, entrepreneurs feel much stress once cash flow problems arise. It’s hard to pay loans, salaries, utilities, and all the other bills that become due. The pressure increases. Whether there are loans or not, the bills must be paid, and relatives, credit card lenders, and banks are insistent. Frequently, the issue becomes the “burn rate”. In other words, “how long can a business hold on?”

Often the bank or lender have no idea what their financial problems are: sound projections and presentation of a good business plan can do much to assist with the renegotiation of debt. In any event, when default on the loan occurs everyone loses. Neithe the bank nor the borrower obtain anything from insolvency proceedings.

For this reason, our office seeks to help entrepreneurs with planning procedures, before cash flow problems arise. Nevertheless, when these crises do arise, sound counsel is necessary to navigate the dangerous waters of default and reassure the bank that the storm can be weathered.

Sometimes assets need to be sold, lines of business need to be assessed for profitability, and real estate mortgages or personal guarantees need to be added to strengthen security of outstanding loans. Nevertheless, if the entrepreneur believes his value proposition is sound, he is wise to “bet the farm” on his expertise, and continue to plow ahead. In these cases, reassuring the bank, returning liquidity to the business model, and moving toward profitability is an immediate necessity many lawyers lack this kind of business experience, and cannot be of help in this area of business. When faced with the task, most human beings like easy work. Negotiation of loans can be hard work.

I still remember the entrepreneur who came to me to explain his business was not profitable, and he didn’t need the large amount of warehouse space that was under lease. In addition, he was in danger of defaulting on the lease, and having the goods warehoused subject to a landlord’s lien. While exploring his options, he realized as we talked that a competitor (who was a dear friend) might be willing to give him storage space, and even assist him with expanded lines of credit. Since moving his location he is much happier, and profitable too!

In another case the individual owned the real estate from which his business operated. By selling the real estate he was able to become current with suppliers, giving him enough time to sell additional customers, enhancing his profitability. Further, the cash received from selling the real estate allowed him to progress forward without financial worries.

Of course, there are a myriad number of options that a good business lawyer helps his clients explore every day. As a small business owner myself, I believe that the key is flexibility. When we listen to our clients, their needs can best be served by applying our experience to assist them in creating satisfactory legal results.

If you are in need of this kind of help, please do not hesitate to give us a call for a candid opinion as to whether we can help in your situation. We would be more than pleased to be of assistance to you. Call us today at (317) 266-8888. As an alternative, you can email me personally at any time: mike@mikenorrislaw.com.

The Impact of Credit Report Collection Accounts

When applying for a mortgage, everyone knows that your credit report rating is of great importance. If you can lower the interest rate the lender charges you, you can save thousands of dollars each year on hundreds of thousands of dollars borrowed for your home purchase. In addition, as most of us know, the credit report will show your payment history on cars (and other installment loans), and it will also show your credit history on credit cards (and other revolving accounts).

Many do not know that the credit report also picks up the docket from local courts, and reports any judgments that have been filed against you. In addition, one more matter is reported by the Bureau, which is of great significance to those who have borrowed money: their accounts which are in collection.

“In collection” simply means a collection agent is attempting to collect on the alleged debt. This does not mean the debt is owed, or that a judgment has been entered by a court allowing for garnishment of wages. It simply means that the collector is trying to collect money on a debt he says is owed.

You may be “in collections” and not even know it. Nevertheless the rest of the world knows, and the obvious inference is that you’re unwilling or unable to pay your debts. This little known secret of the credit reporting agencies can have great significance when you’re attempting to secure an apartment or job, get a loan, or even get utilities turned on.

Surprisingly, statistics show that 35% of Americans currently have unpaid bills reported to collection agencies, according to an Urban Institute study conducted in the last few months. And it’s not just hospital bills, auto loans, and student loans. Even past due gym membership fees or unpaid cell phone contracts can end up with a collection agency.

And the collectors are always ready. The Federal Reserve Philadelphia bank branch estimate that in 2013 the collections industry employed 140,000 workers, to recover $50 billion of debt that year. Oddly enough, delinquent debt is overwhelmingly concentrated in southern and western states. Texas cities have a large share of their populations reported to collection agencies: Dallas (43%), El Paso (44%), Houston (44%), McAllen (52%), and San Antonio (45%). And the blight is not limited just to Texas. Almost half of Las Vegas residents have debt in collections, and other southern cities a large number of their people facing debt collectors: Orlando, Jacksonville, and Memphis, among others. But some cities fare better, with some demographic populations have low collection rates, just around 20% for Minneapolis, Boston, Honolulu and San Jose (California).

How do these differences come about? Some say this can be blamed on income disparities, and a stagnant economy. US Labor Department statistics show wages have barely kept up with inflation during the five-year recovery starting in 2009, and after-tax income fell for the bottom 20% of earners during that same period.

So what is the morale of the story? The wise consumer will make sure his debts stay out of collection. This practice will reap rich rewards when it comes time to buy a home or car, secure a job or apartment, or secure the lowest loan rates.

Student Loan Debt: Does It Ever End?

I’ve always loved teaching. After working my way through law school in Detroit, I decided that I would try to secure a teaching job as a full-time occupation. In 1973, I taught my first class to a young group of students trying to get their real estate licenses.

When I moved to Colorado in 1976, I immediately looked for a job in education. I couldn’t find a full-time position immediately, so I taught at a number of community colleges. By the time 1978 rolled around, I had secured a full-time teaching job, and I retired from the University of Colorado (where I was a full-time college professor) after six years of teaching full-time. This was a very enjoyable time of my life. I believe that “knowledge is power” and found myself quite satisfied with life as an educator.

Back in the late ‘70s and early ‘80s, there was much less student loan debt. My mentor at the University of Colorado was amazed by the ever-rising cost of college tuition. The rapid increase of administrators and bureaucratic processes from his start in the 1950s was to him quite shocking. He like to fondly recall the “good old days” when the faculty in essence ran the school, set the budgets, and defined acceptable curriculum.

He cautioned me many a time that we did not need so many administrators, buildings, and miscellaneous programs unrelated to teaching and the process of learning itself. In his mind, a college (or a university of many colleges) was simply the faculty and staff absolutely necessary to keep the buildings open. There wasn’t a need for other “nonessential” personnel. I’m sure he would be quite shocked today, if he were alive, to note the many six-figure incomes found on the average college campus for administrators, deans, coaches, marketers, and others who are not full-time professors. The sports budget would have seemed to him most unusual, and the time spent by college alumni thinking about sports would have seemed to him completely unrelated to the primary purpose of the institution. Of course, his love of learning was intense, and it was simply that love of learning which he considered the “bottom line” or essence of a university.

From that point of view, the cost of college tuition needs to be kept down, and the number of services offered (other than the granting of degrees) needs to be modest. Of course, all would not subscribe to that way of thinking.

Nevertheless, the statistics tell a different story. The cost of a college education has increased significantly in the last 40 years, far outstripping the inflation rate in the nation. Even public institutions, which are funded by the state with the primary mission of educating that state’s citizens, have seen rises in tuition that are astronomical.

Of course, from my mentor’s point of view there’s no reason for this, due to the fact that those schools are funded and supported by state tax dollars. In his mind, those tax dollars should pay the entire cost of institutional attendance, other than a very modest and easily affordable tuition. From this point of view the elaborate sports programs, stadiums, and administrative staff (including marketing staff) are not necessary.

What we find today is that college is very expensive even at a state school, with very significant budgets supported by alumni donations, and various subscriptions and fees far in excess of the tax dollars contributed by the state.

The student who doesn’t have tens of thousands of dollars to spare for each year of college education find himself taking out student loans, hoping that the value of the education will help him pay back this significant loan debt.

Gaining relief from student loan debt is not easy, as it is not dischargeable in bankruptcy. Nevertheless, the federal government is now attempting to use a program called “income-based repayment” or IBR to address for students the significant burden they bear in paying back student loans when just out of college.

Although income-based repayment is an excellent solution in theory, many servicers are slow in processing the request for payment adjustment, and this can cause significant hardship. The cost of college tuition is still quite high, as governments (which once assumed almost all the risk of college by heavily subsidizing the cost), are now withdrawing a large portion of their support. One could easily ask the question: “is it wise for state and federal governments to ask the young and impecunious student to bear larger and larger portions of the cost with student loans to finance increasingly expensive college education?”

At this point in time, 40 million people hold student loans, and that debt has risen to $1.1 trillion, compared to $300 billion just a decade ago, according to research by the Federal Reserve Bank of New York. Student loans are now the third largest form of household debt in America today, and 7 million borrowers are in default, with many more behind on their payments. Young borrowers, fresh out of college, often do not realize that with a damaged credit record they face higher interest rates on all goods (including cars and homes), and could easily be rejected on apartment rental applications, or lose job opportunities where credit is evaluated. Indeed, the cost of college and the financing of it is one of the larger crises in the lives of young people today.

One study by Brent Ambrose, a professor risk management at Pennsylvania State University, indicates that the burden of student loan debt may cause people to take different directions in their life choices. Those who are burdened by too much debt are less likely to start businesses, and have a much harder time shouldering the load of a house payment. As Ambrose puts it simply, “when students use up their debt capacity on student loans, they can’t get committed elsewhere”.

This sort of financial disruption shuts down the ability of the young entrepreneur to create a new business, and also affects career choices, such as working in a low-paying teaching job simply because you love to teach.

I seriously doubt that the cost of college tuition will be coming down dramatically in the near future. But we must find a way to finance college educations so that young people are not overly burdened with debt immediately after coming out of school, debt that frequently cannot be paid. Should the federal or state government take a greater hand in subsidizing college costs, and in restraining unrestricted growth of expenses on college campuses? Only time will tell, but the question is worth asking and considering.