Pretty shocking, given the punishingly high cost. And since respondents reported using their credit cards as sources of funding, we can safely assume they carry balances. Add to this the turmoil in the credit card market today and we have at hand a real challenge for small companies.

In the NSBA’s recent study, conducted between April 27 and May 5, some 79 percent of the companies that responded reported worse terms on their cards (i.e., higher interest rates and fees) compared to the prior year. To be sure, credit card companies are paring down their loan limits, raising interest rates and fees, and reducing their risk. They’re doing so to try stemming their losses. See the accompanying tables that show the spike in delinquent accounts and bankruptcies.

Capital Is Critical

The issue here – funds needed to operate your business – is deadly serious. Run out of money and it’s game over. So what’s a business owner to do?

Of course, the best option is to build a business that generates cash and allows you to fund its operations through cash flow. Many business owners do achieve this, and you can, too.

This publication gives many tips for building such a business. And, of course, doing so is a long-term project. Furthermore, even businesses that generate strong operating cash flow may choose to use debt to fund rapid growth, enhance return on equity, or smooth the hit to cash caused by periodic capital expenditures.

So, what are your options?

Traditional Bank Financing

Have you tried to obtain traditional bank financing? Despite what you read in the press, banks are lending. More than that, they’re lending at all-time low rates of interest. So if you already have a relationship with a banker, give him/her a call to discuss paying off or paying down your credit card debt. If you don’t have a lender, get a referral from one of your business owner peers.

Keep in mind that new SBA loan programs are incredibly attractive. Your lender will be able to help you evaluate the programs and assess the opportunities.

In summary, business owners must get the funds they need. Credit cards are a substantial source of funds for small businesses and, at times, one of the only sources available. Every business owner should endeavor to move beyond credit card dependence as a primary source of funds. It’s just too expensive. Credit cards should be used for emergencies only.

A short-term funding source of last resort.

To qualify for a regular business loan, all you need is to build a relatively stable business that is profitable, has organized books and records, pays its income taxes and maintains modest levels of leverage.

You can get there. The Business Owner can help.

According to Dr. Jay-Kent Ferraro, this is quite common. “A great many business owners derive their identity solely from their business or financial success,” he said. “The only place they feel alive is in their business. Most are Type-A personalities. Success-oriented. So long as they’re successful, their sense of self-esteem remains intact, but it’s a shallow and tenuous existence.”

Just a Matter of Time
“The thing is, businesses and careers are filled with peaks and valleys,” says Claire Cornell, assistant director of the Family Owned Business Institute at the University of Tulsa. “No one achieves success perennially. Business is about persevering through the peaks and valleys. It’s about resilience.” Ferraro, a counselor, life coach and organizational consultant, says business owners who have a more healthy and diversified set of self-esteem anchors will be more resilient. Better able to endure the ups and downs. Less likely to turn to self-destructive behaviors when things aren’t going their way. Ferraro urges business owners to find activities that provide them with meaning and enjoyment, such as hobbies, community service or more involvement in their loved ones’ lives.

What About You?
Unfortunately, most business owners don’t know how unbalanced their lives are until it smacks them in the face. So Ferraro encourages owners to look at their lives objectively. Take, for example, the business owner who describes himself as a devout family man but spends only two hours a week with his wife and children. Or the business owner who travels 150,000 miles a year on business but never takes a family vacation. “Imbalances such as these show a huge disconnect between what a person thinks and actually does,” says Ferraro. “You may think you’re a family man, but your actions show otherwise.”

Epidemic
“This problem – the tendency for business owners to over-rely on their financial success for their happiness, identity and sense of self-worth – is more prevalent than people think,” says Ferraro. “Today, a lot of business owners are being exposed. They’re finding out the hard way. Personally struggling mightily because they’re not proud of how their business’ financial statements look. Even so, few are talking about it because they’re either brain dead and don’t know what’s going on or they think that talking about it, or acknowledging it, is a type of weakness – a vulnerability they cannot allow. To these people, to admit vulnerability is almost a sign of failure, so there’s a tendency to avoid that type of discussion.”

This Too Shall Pass
Cornell says failure presents an opportunity for growth. Tim Farley agrees. It’s been eight years since Farley lost his home, business, identity and sense of self-worth, but he’s recovered. Now he says, “We’re on our feet financially. I have a good job and little stress. I know who I am and think my self-worth is robust and is spread across a much wider base. I’m not sure if I’d even change a thing. I now know that I was in an unhealthy place long before the financial problems. My self-worth rested squarely on one narrow leg – business success. It’s like the hand of God gave me exactly what I needed – a major life shake-up. Incidentally, I think I’m wiser as a business person now. Much more realistic. Much more respectful of what it really takes to start, capitalize and grow and succeed in business. I may even venture out again into the world of business ownership. If so, I think I’d have a greater chance of success and also a greater ability to handle struggle or failure.”

The risk of bad debt loss today is very real. I’ll spare you the “today, more than ever …” line here, but you get my point.

So what are you going to do about the heightened risk of bad-debt loss? You’re going to manage it – and we’re going to show you how.

Step 1. Remove All Doubt.

I’ve met a lot of people who lose the receivables collection battle before it’s ever begun. Why? Because, for some reason, they look at debtors with empathy and somehow don’t want to be “tough” on them. If this is you, snap out of it! Talk with someone who can help you: your partner(s), employees, board members, bankers, or even a psychologist.

Think about it. Your customers requested credit terms. You agreed. They purchased your product and made a promise to pay. We’re all adults. You did your part and delivered the goods or services. Now their part is to pay. If they are having problems paying, it’s okay to “feel for them,” but your job is to manage your own business effectively and prudently, not theirs. Your job is to protect your own employees, vendors and shareholders. You must do it with maturity, courage and discipline. This means getting paid using whatever legal means necessary.

Feel emboldened? Good.

Step 2. Manage Expectations.

After you’ve decided that you will require customers to pay in full and according to the terms (or if they are already late, begin making real progress toward catching up), go to work on your employees and customers. Explain to them what is expected, what will be tolerated and what won’t. If certain customers
have not quite paid on time in the past, talk with them. Further, send a formal letter outlining your payment policy. If things need to change, go ahead and change them.

Step 3. Study Your A/R Aging at Least Once a Week.

Collections are all about vigilance – having a plan and following through on it religiously. So watching your A/R aging regularly is essential. As accounts begin to approach their due date and remain unpaid, it’s time to implement whatever response you developed for this occurrence. Typically, it’s a phone call to the customer or a letter or email that says something simple like:

Dear Cheryl,

This is a friendly reminder that our records show that invoice number 2212 for $300 is due in just five days
(March 30) and remains unpaid. To ensure that you’re aware of it, I’ve enclosed a copy.

As always, we appreciate your business.

Please call us if you have any questions or concerns.

Regards,

Jack Benson

Office Manager

Of course, some accounts may be past this point so then it’s a matter of taking appropriate actions. Often, it’s about working out payment – progress – with the debtor. Develop an understanding of “where do we go from here.” Then it’s your job to help your debtor meet those terms or “do what you have to do,” whether that’s to refuse further shipments or begin legal action.

Step 4. Be Objective. Be a Gentleman (or a Lady), but Deal with Reality.

The reality is, in every troubled account case, SOME vendors are getting paid. You know what I mean? The customer that owes you money IS paying SOME people, just not you. The question is why others are getting paid and you aren’t. Likely it’s simply that the other vendors are requiring payment. How does that make you feel?

If you have a hard time dealing with your collections objectively and firmly, consider getting someone else to handle the task. Some people are great at it and some are just terrible. Similarly, some people actually like to handle collections, and they’re usually the ones who do it well.

A common characteristic of a poorly run company is weak credit and collection policies and practices. Could this be you? If so, endeavor to turn it into a strength of your firm. It could mean the difference between survival and failure.

Filing fees are minimal, usually around $30, and the information required is also minimal. Upon receipt of your application, the small claims court clerk assigns a case number and trial date, usually within three to four weeks. You must provide a copy to the defendant at least 10 days before the trial, but you are not permitted to deliver these papers yourself. You must use certified mail, county sheriff, process server (listed in the Yellow Pages under “Process Servers”), or anyone over 18 who is not involved in the case. Certified mail is cheap and easy.

You must then file proof that the defendant was served with the notice. If the sheriff or professional process server delivers the notice, he or she completes a certificate of service and sends the original to the court on your behalf. If another person serves the notice, you must have that person sign an affidavit of service in front of a notary public. If the defendant is served by certified mail, file the return receipt as proof of service with the court clerk.

When you (or your representative) arrive at the courtroom, check in with the court clerk. When the case is called, you are sworn in along with the defendant and any witnesses. Explain your case and provide any relevant facts and witnesses. The defendant does the same. When both sides have been heard, the judge renders a judgment that is binding and has the full force of law as it allows for garnishment of wages or a lien on the defendant’s assets.

Steve Soule of Hall Estill provided his expertise for this article.