Herman: John L. Herman Jr., Author

Secured Versus Unsecured Debt

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.

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.

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.

• Posted: 9 November 2007
• Comments: 1
• Category: Business failure

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