How to convert credit card debt to a business loan?

November 6, 2009 3:31 PM

You are not my accountant. How do you convert personal debt to business debt?

My sister-in-law and her husband are the owners of a chiropractic practice with no employees other than themselves. They opened the practice shortly after being married, and paid for nearly all the startup costs with their credit cards rather than securing a small business loan. The business is doing fine, or anyway as fine as it really can be given the economy; they have a steady and increasing client stream, and word of mouth is getting out.

But their interest rates have been hiked on their credit cards, and now they're facing increasingly enormous minimum payments that are really affecting their ability to get by. In retrospect, their decision to use credit cards for this purpose was pretty poor, and they recognize that, but barring a time machine, they can't change that now. In this economy, what's the chance of them getting a business loan now? Is there any way they can convert this massive unsecured consumer debt into a business debt that's more reasonable, interest-wise? Any other advice for them? They're in a largish city in the Pacific Northwest.

posted by KathrynT to work & money (8 comments total)

I suspect that their chances of getting a small business loan have more to do with the state of their business (is it solvent, growing, and so on) then their own personal debt situation, but I'm neither an account nor a small business loan officer. Transferring the debt somehow seems (reflexively) a bit sketchy, since the business would be essentially 'purchasing' a liability, and I'm not sure how that would square up on the books later on.

If their credit load is really keeping them from getting by, a drastic (and painful) reduction in expenses while paying it down is probably the way to go. A few years ago, I might have suggested declaring bankruptcy, but that ain't what it used to be. I did so for business-related reasons in the mid-90s and it relatively painless, but I know that the laws have since changed and I've no idea what the ramifications are today.

A chat with an accountant is probably in order, perhaps by way of barter? Do they have any CPAs as patients?
posted by jquinby at 4:05 PM on November 6

They should go talk to some banks. Wells Fargo has a small business practice aimed at medical practitioners (including chiropractors). Talk to smaller local banks as well, as those institutions tend to specialize in small businesses.

Also, they shouldn't beat themselves up about using credit cards to launch their business. That's how it's usually done. The likely next step is a small business loan which they personally guarantee. It'll be cheaper than a credit card, but they're still on the hook personally if the business fails. Personal guarantees are standard practice for small business loans. The proceeds from the small business loan will go to pay off the credit card debt (again, this won't be surprising to the bank). The bank will probably ask them to move their deposits and other bank services as part of the deal.
posted by mullacc at 4:59 PM on November 6

They should check their personal credit scores and work on improving them, if necessary. Most small business loans are going to run the personal credit histories of the business owners, so hopefully they are keeping up on their payments and not too close to the limits on their cards. Otherwise their FICO scores will suffer.
posted by Jacqueline at 6:25 PM on November 6

They should be prepared to give a loan officer a statement of monthly cash flows, in order to prove that they can finance the debt.

The best answer they will get is from their accountant. I'm assuming they have retained the services of an accountant? Or else have bookkeeping skills of their own.

But regardless, they need to make sure their books are in order and that they have all the pertinent paperwork in order.
posted by dfriedman at 7:00 PM on November 6

You haven't told us how long they have been in business. If it is more than a year or two, and if it is well-managed, then the chances that a bank would provide a business loan may be pretty good. A lot depends, too, on their location. There are companies that are sensationalizing their ads with a shrill "Banks are no longer lending to businesses. Come to us." And that may be true in some areas of the country.
posted by megatherium at 7:11 PM on November 6

They've been in business for just about exactly two years. I don't know how to tell if it's well-managed or not, but they have had an increasing client stream for that entire time -- modulo about four months right after the November crash. They're in a rapidly gentrifying part of the city; it's about two thirds of the way along the bail bondsmen --> indie record store --> coffee shop --> wine bar transformation.

As for cutting expenses, they're already living in Grandma's place rent-free, they don't have cable or any internet besides dial-up. They have a young baby who complicates matters somewhat, but they're breastfeeding and cloth diapering and getting pretty much everything in hand-me-downs. I'm not sure there's a whole lot else they can cut. The minimum payment on their credit card is their single largest expense since their interest rate hike.

The Wells Fargo program is great, thank you, I'll pass that along to them.
posted by KathrynT at 10:20 PM on November 6

Even if they can't get a business loan, they should be able to get a personal loan to pay off the credit cards.

Transferring the debt to the business is perhaps sketchy as it may have tax implications that you will NEED an accountant to answer or at least avoid - the business paying off personal credit card debt will look like income, which will mean lots of tax.
posted by polyglot at 4:50 AM on November 7

An accountant should be able to help with this. Although I live in Canada, my accountant here told me that you can sometimes write off a personal credit card's interest if you can show that it was used to finance the business, provide for gaps in cash flow and so on. In fact, my accountant asked me to dig up my personal credit card receipts to see if there was anything we could justify. However, because I pay off my balance every month, it didn't help me at all. But your SIL should see if an accountant thinks it makes sense for them.

They could also ask their accountant if they can get a personal loan and bring it into the business and THEN use that loan to pay back ONLY the business portion of the debt. I use all sorts of personal banking products exclusively for business. There's no law here, anyway.
posted by acoutu at 7:03 PM on November 7