100 ; INC. ; JUNE 2019 ; ; ; ; ; ;
(@normbrodsky) is a
He is the co-author
of Street Smarts:An
All-PurposeTool Kit for Entrepreneurs.
NORM BRODSKY ; STREET SMARTS
several cards in this fashion, but they didn’t worry as long as
revenue and cash flow kept increasing. When sales leveled o;
in 2018, however, they grew concerned.
To assess how serious the situation really was, I first had
to determine whether the business was viable—that is, if it
didn’t have all the debt and if the McCreas didn’t take too
much out in salary and perks, could the company sustain itself
on its own internally generated cash flow? I asked Jason and
Kate to add up what they were paying monthly on their loans
and to estimate how much they were compensating themselves, including any personal spending—say, for a car or for
health insurance—charged to the business. When we looked
at an income statement without those expenses, it was clear
that the company could be very profitable.
So, how to reduce the credit card debt? I could see the
McCreas had the wrong strategy. They were certainly right to
pay the monthly minimum due on each card, but the credit
card companies couldn’t care less about the extra amount they
paid over that. I told them to stick to the minimum on all but
one of the cards—specifically, the one with the highest interest
rate. Given their excellent payment record to date, the issuer
would likely be willing to give them a lower rate if they asked
for it. Then they could take all the above-the-minimum money
they’d been spending on cards and use it to pay down the one
with the highest interest as fast as possible. Once that one was
paid o;, they could focus on the card with the next highest
interest rate and do the same—and so on until they retired all
of their credit card debt.
Kate and Jason have now started the process. Meanwhile,
we will look for other ways to improve their company’s profit
margins. I’ll let you know what happens in a future column.
hear from a lot of entrepreneurs who are having problems
and don’t understand why. If you
look hard enough, there’s always
a logical reason for whatever has
happened, but it can be di;cult
to pinpoint when you’re dealing
with a variety of issues at the
same time. It’s especially tough
if you’ve had to take on debt
from multiple lenders to finance your growth and they are
all charging di;erent interest rates.
That was more or less the situation that Kate and Jason
McCrea found themselves in several months ago, when Kate
first came to see me. She realized that something was wrong
at their company, McCrea’s Candies, but she wasn’t sure
what it was.
The McCreas started the business in 2010. They sell
caramels that Jason, who has a background in chemistry
and an interest in food, developed the recipe for. His ambition
was to make the best caramels in the world. Customers
loved them. As word got around, sales began to take o;. The
company grew 30 percent or more annually for several years
in a row.
With all those orders coming in, the McCreas needed cash
to pay for supplies to make, package, and ship their product.
When it was clear that their own savings and loans from
friends and family would not be enough, they raised more by
signing up for zero-interest credit cards. The deal with these
cards is that you can spend up to your credit limit and the
money is interest-free for a given period of time, usually about
a year. But if it isn’t paid o; by the end of that period, you
owe interest on the outstanding balance at whatever rate the
credit card company charges. That rate can range from 14
to 25 percent.
The McCreas would have preferred to retire the entire
balance when each card’s zero-interest period ended, but
they couldn’t always a;ord to. In that case, they would pay
the minimum plus a small amount more. They were juggling
Climbing Out of Debt
It’s easy to fall into a debt hole when you have
a fast-growing startup, but with the right
strategy, you can usually find a way out.