My Husband Runs His Business Off Credit Cards. Now We Need to Get Out of Debt.

“Dear Steve,

My husband owns a successful family owned small business. He however had been taught from an early age, how to run it off of credit cards. We are at the point of 4 Credit Cards, with total of 100 K, and a line of credit of 85,000. He has committed to stop using Credit Cards to pay the Vendors, with a goal of building our cash flow, so we no longer have to “pay peter to rob paul.”

My question is, should we attack on Credit Card at a time, with the goal of paying all 4 off.( Some months, we can only make a minimal payment. If we land a big job, we are able to apply anywhere from 5-15K to a card. and most have a high APR) OR would it be a better idea to get a small business loan, or Debt restructure? I am weary about restructure/consolidation. We are however, committed to get these CC paid off and run the business debt free/

Megan”

Dear Megan,

Thank you for contacting me for advice.

One bit of clarity we need to get straight off the bat is how successful the business really is. The reality is that it seems that your apparent success came at a cost of $185,000. The reason the debt is so insidious with a small business is that I’m sure your husband felt things were going along great as he generated business that resulted in income but the cost to vendors was off loaded onto credit and not paid in full when it was incurred. This results in a false impression about how the business is actually doing. One example that comes to mind was a couple that was running a successful pizza shop in a small town. They put all their supplies on credit cards but once these were eliminated they were unable to survive on a cash basis.

Now we are faced with digging out of that hole and running the business on a cash business moving forward. I’m rooting for you to succeed but this is probably going to be a tough awakening.

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Getting this back under contrail is going to require focus on several fronts.

You need to make at least your minimum payment each month to keep the debt at least current.

If you have additional funds that come in that allow you to tackle the debt I’d rather see you get $10,000 into a business savings account first to cover your business emergencies so expenses don’t need to wind up on credit again. You can use the cards, just pay them off in full at the end of the month. In case of a financial surprise you may need to dip into the emergency fund to do it. Then focus on building the emergency fund back up.

On tackling the debts, while it makes the most mathematical sense to tackle the highest interest rate debt first, it can often be better to knock out smaller balance debts first. If you can give me an idea of the balance and interest rate of each I can give you a more detailed plan of attack.

I think we can get you out of this hole without a loan as long as your husband is committed to making the business successful on a cash basis.

Please post your responses and follow-up messages to me on this in the comments section below.