Ask HN: Clients are gone, lots of debt, what would you do? | Hacker News Reader

Ask HN: Clients are gone, lots of debt, what would you do?

87 pointspatryn2065 comments

Last October I left a comfy job at a marketing startup that had become very profitable (Inc 500, NY Times articles, and all that jazz). I had stopped taking classes full time to work with this company, so I never completed my CS degree. After leaving my job, I started my own company to develop some consumer site ideas. My partner bailed early to go to law school, so there was a bit of a gray cloud overhead from the start.

In order to get money coming in I began running lead generation and online marketing for a few clients. Over time, that grew to consume my entire working hours. It peaked at about $70k in revenue in July and has been steadily declining from there to a low of $15k in November, thanks to the economy and increased online ad competition.

On Monday of this week, without warning, my last two clients pulled the plug due to economic conditions. The deals were profitable, but they had too many account defaults. One client has seen his annual bad debts total double in November. So, to free up cash flow, they cut me loose.

I poured my entire savings into the company and had up to $50k in credit card debt at one point. Running online campaigns and lead generation, you pay for ads up front and invoice in arrears.

As the company made profits, I paid myself as little as possible to cover my bills. The rest was used to pay down debt. Early on, I tried doing contract work on the side to pay my personal bills. This worked until I was stiffed on a large project. Since the business was making money by this point, I focused on it full time.

As it stands, the company has about $13k in credit card debts. I have an additional $17k in personal credit card debt from living off of credit before the company was profitable.

The corporation is getting one last $6k check. There are no finished products to show for the last year, no remaining savings, an incomplete CS degree, and $30k in debt between the company and myself. The corporation also has contracts to keep its rack space until the end of January at a cost of $600/month.

I just sold my old (expensive) car and got a Toyota. I am vacating my apartment and bumming with parents and friends.

The corporation has an internal advertising and lead management system that I am tempted to lease to customers. There was talk with some local Austin marketing guys of launching that as a product a few months back, but it never worked out. There are currently four servers sitting idle that could be put to use. There are also three consumer sites in various stages of completion.

If you were in this situation, what would you do? Dissolve the company, get a job, and move on? Go back to school? Launch the advertising product? Launch the consumer products while bumming around to avoid rent? A combination of the above?

Has anyone been in a similar situation? I am seriously stressed out and likely not thinking clearly, so I would love an outside perspective.

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Ok, so this isn't the situation that you wanted to be in but, equally well, it hasn't all been for nothing. You have had a huge life experience that most people will never have. The trick here is to capitalise on that experience and to learn from it. You're also young enough that isn't the end of the road for you. Indeed, I'd say most successful entrepreneurs have at least one failed startup behind them so you're in good company.

My advice? Don't waste this time. Work out a plan to repay the personal debt (I would consider this the top priority) probably by finding at least a part-time job. Tackle the personal debt first, in an upfront and mature manner, as it has the biggest long-term consequences.

Business debt? I'm not so sure what to advise but those servers shouldn't be sitting idle. Try renegotiating the server contracts for just one server over 6 months instead of the 4 servers over 2 months. Then get the consumer products out there, visible and some (really cheap) promotion. If the consumer products are up and running, even without a large volume of users, you can show that the company has assets and potential, which may allow the business to raise money or be bought out. I'm not sure about the advertising product as it doesn't seem like the best market right now.

And thanks for telling your story. There's far too many happy, smiling, this-will-make-me-rich, everything-is-fine, what-could-possibly-go-wrong startup founders telling their stories and it's good to hear the other side of the coin.

Been there, and it's tough.

Based on my own experience I would recommend the following:

- Make sure you're ok, it's hard emotionally taking a hit like that, but it happens to all of us. As ksvs said in one of the other comments even Joel Spolsky hit the wall during the last bust. Realise that it's not your fault, talk to friends, enjoy life.

- get out of debt, it's a killer. I've been in worse debt and it's not as hard as you might think to get out of it. Talk to your creditors, tell them the situation and be straight about it. There's a good chance that you might be able to negotiate a deal where you don't have to pay it all back, or get lenient terms. Creditors like straight talk and hate excuses.

- when you're past the first two points start a company - the education that you have just finished by going broke with a company is worth much more than a cs degree. You have just improved your chances of success considerably. Almost nobody succeeds the first time, but the ones that start their second company have a much higher rate of success.

Good luck.

I would go forward from where you are. Look for additional contract work and look for additional business that can leverage your assets as they are. Tell everyone you know that you are looking for work and are available to start immediately. Go back to all of your old clients and see if there is any basis to consult/contract or support them--that doesn't involve incurring additional expense in advance.

Simplify your life to the point of austerity and pay as you go. Don't "bum" anything from anyone, e.g. find a mutually acceptable quid pro quo for room/board from parents and/or friends. Sell any other assets you don't need for work (e.g. television, videogames, other non-essential and time-wasting items), use the money for food and debt service.

On 30K of credit card debt my calculation is that you owe about $500-600 in minimum payment, use the 6K to continue to make minimum payments. Put your credit cards in your sock drawer and only carry one for bona fide emergencies (e.g. car breakdown). Carry cash and pay cash for everything, it will give you a sense of where you are spending money immediately.

Don't take any contracts that require you to advance any money or risk more than a week's labor until you get your debt paid off. Don't "pay up front and invoice in arrears," get your clients to cover the up front expenses and take a fee for your services and the use of your software platform.

Rather than keep the 6K separate, pay the 6K on one of your cards (the one with the highest rate) and do a cash advance on the card every time a payment is due, this will decrease your interest a bit.

You're probably paying 20% on your cards to, currently you have a yearly income - on paper anyway - so banks will still talk to you, so look at minimizing the interest, some options are 1) get a personal loan for around 5 or 6% (not sure of the current rate in the US) from a bank 2) get one of those cards with a 2% transfer rate for 6 or 12 months and transfer all your debt to one of those cards then stick it in your sock drawer

30K probably seems like a lot now, but it's not much in the scheme of things just do all those unpleasant expense minimization techniques and watch every penny and it will be gone in no time.

He needs that 6K to live on until he can find more income. If you pay 6K on the credit card you still owe the minimum payment next month only now you're broke. At the margin he will have to declare bankruptcy. This is a cash flow budgeting problem: many bootstrapping startups face these kinds of issues.

As for getting a personal loan he's broke and has no assets: I would be cautious about falsifying a credit application.

He needs to focus immediately on income: focusing all of his efforts to earn many times more than $600 (6 months of 20% interest on 6K) over the next six months will be more useful than more debt juggling.

No, if you put the 6K on the card, you're limit is still the same, but you are charged less interest. You can then take money off the card as you need it and you are then paying interest on the current balance. e.g.

Balance = 20,000 Payment of 6,000 Balance = 14,000 - interest is now calculated on this balance next week take out 500 Balance is now 14,500

and so on.

'will be more useful than more debt juggling.' it's not juggling debt it's minimising you're costs. Not minimising your costs is the difference between having enough cash to be a startup for another 6 monts or not

30,000 @ 20% interest = $6,000 p/a 30,000 @ 3% interest = $900 p/a

To maintain the 30,000 debt on a card you'd have to come up with 6,000 a year if it's a personal loan it costs you $900 a year - so fo a couple of phone calls you can change your costs by more than $5,000.

'I would be cautious about falsifying a credit application.' I never suggested any falsification, this is debt management 101.

This can be a a slippery slope: you put the 6K back on and you borrow more than 6K again. For folks who are in debt it's a safer habit to switch to pay as you go.

As to taking out a new loan when he doesn't have a steady source of income and no assets to offer as collateral it can be difficult to be entirely candid on the application and still get the loan. In hindsight your creative writing may be construed as fraud.

So your saying it's a crime to reduce how much money you have to repay?

I was assuming he would be obtaining some sort of income, either a job or some new contracts. If he doesn't the 6K will buy a couple of months, there is no fraudulent intent, the debt still exists, it's merely minimising your costs. As others have said credit cards are a nasty way to fund a startup, but financial institutions make them easy to obtain, likewise they make obtaining lower cost methods of obtainin capital difficult, and who can blame them - 20% versus 3% why wouldn't it be structured as such. I find these comments interesting that there is any resistance to getting a personal loan, it has been made so difficult, the banks buy their money at 1% and sell it at 20% on credit cards, what a game. Personal loans are unsecured and go by the ability to repay and credit history. I'm assuming patryn20 has a credit history by repaying his cards on time and will obtain a method to repay the loan, to keep repaying at credit card rates would be foolish.

It's only a crime to falsify the application. I agree with you that "personal loans are unsecured and go by ability to repay and credit history." In the absence of reliable income it's hard to accurately represent an "ability to repay." He would be much better served in the near term to find new sources of income. Without them he is destined for bankruptcy.

I agree new sources of income are required, but also a debt management startegy is required. As I mentioned before, the debt as it stands is costing $6000 a year or so, it would be very easy to cut that down to $1000 a year or so (that's just the interest), if you can get the interest down to $1000 a year then the other $5000 can go on repaying the principal and hey presto it's gone in 6 years by making a phone call or two with absolutely no change in what you are paying. If you can make the repayments pre tax money then it's even easier.

I haven't been in such a situation... but you said, "Sell any other assets you don't need for work (e.g. television, videogames, other non-essential and time-wasting items), use the money for food and debt service."

Is the $500 you're going to get for selling a TV and a video game system going to help that much? It seems that you should keep anything you actually use, to me - you're in enough stress as it is, you don't need to make yourself feel desperately poor.

Or am I missing something?

It's a question of focus. He is desperately poor: he's completely broke. He has talents that he needs to focus on making money. My assumption was that he still wants to be an entrepreneur: he needs to learn how to bootstrap on minimal cashflow.

I think you'd get a bigger payoff from not having the TV and games around to distract you than simply the $500.

Every hour not spent watching TV can be better spent somewhere else, even if all he's doing is reading.

TV is a "two bird stone" in that regard. Videogames as well.

Good advice about not wasting time on people who want 'credit' - always check before hand how long it will take you to get paid. And don't count your money until the check clears. (though personally I'd wait two weeks, or even a month for a client if I couldn't do better.)

about selling crap:

sure, selling your video game system and TV is fine... if you have systems that are worth more than the time it takes to sell them. Right now it's pretty easy for me to get work at $80/hr... selling, say, the obsolete servers in my garage or my TV won't net me $80/hr.

I guess it might make sense if you have nice stuff, or if you can't find contract work at all. (I've been there, I've made rent by selling obsolete computer parts.

There are things you should do right now to deal with the debt. First off, the rack space contract. You can almost certainly get out of it by phoning the company and explaining that the choice isn't between cancelling the contract now or getting paid for another two months, but rather cancelling the contract now or fighting other creditors over the non-existent assets of the company at liquidation. As long as you can talk to a real human being who is authorised to make a decision, then that one is a no brainer for them.

Secondly, I think you'll probably find that declaring the company bankrupt won't free you from liability for most of the debt it owes. You should try your hardest to deal with both the corporate and personal debt through some route other than bankruptcy. It isn't a totally unmanageable sum, but it could quickly get that way since we're talking about credit cards here.

I guess your best bet is to look for a full time job as soon as possible. In the mean time, phone your creditors and explain the situation. If they're nice you'll probably be able to organise some form of payment holiday until you're earning again, with a more reasonable rate of interest. With the current economic climate, my guess is lenders are just happy if their customers intend to pay back what they owe, and they'll bend over backwards to help you.

Anyway, sorry to hear about your situation. Its a tough break becoming victim to the economy through no fault of your own. Hope some of this helps.

Lots of great advice here. I was involved with a company that ran out of money which had a very high burn due to infrastructure. The server company was more than happy to work with us... that's an easy first start to minimize any additional expenses.

I don't have a lot of personal advice to give you to help you out of this situation. However, on the surface I do feel you made some mistakes that you should never make again.

1. Driving expense car while in debt. Wasteful. 2. Living off credit cards when you could have easily shacked up with the 'rents from the start.

I'd probably talk with a REPUTABLE debt advisor to figure out how to get out of this mess. Until then, get a job and/or look to liquidate what you've built.

Keep your head up... I'd probably look to liquidate as a last resort... if it wasn't for the economy, it sounds like you'd be in a lot better shape... so if you can withstand the squeeze for the next 6-12 months with an interim-job, then you may be in a great position to catch the rebound.

ps. I'm in Austin and go up to Conjunctured from time to time. My contact info is in my profile if you'd like to grab coffee sometime soon.

Evaluate what you're good at and start a new company? You have run a successful company, only got screwed by the economy. You basically have 13 + 17 - 6 == 24k in debt. If you go bankrupt with the company, that drops to just 13k (assuming that it's not secured with your private finances).

You say there are no finished products, then go on to say there's a good advertising/leads platform. Can you spend a few weeks pounding pavement and looking to sell or lease that platform? Start a new company, and go for it. Remember to sell both the platform and your knowledge as a consultant. You only really need to find one or two decent clients for that to work out well (rather than a dozen for just selling blackbox software).

You'll be in for a rough time, but a part time job would help smooth out the financial bumps while you get a new company up and running. It sounds like you have the experience in a valuable field to make something work.

Thanks for the reply.

The corporate debt had to be secured on my finances since this was a new company and had no credit history. That makes it hard to get away from.

The advertising platform is currently pretty specifically for internal use. No support for client data segregation and so on. Wouldn't take too much to fix that, though.

My main stumbling block is that I have no savings and no credit to fall back on while getting something ready for launch. I have mentally really been leaning towards starting a new company, but not sure how to pull it off right now.

Austin, huh. Nothing concrete to offer by way of advice, but a couple of friends who recently graduated from UT launched an advertising startup. Maybe I could put you in touch?

Are you at conjunctured? I've been meaning to check out that space. I can swing by in a couple of hours if you're going to be there.

Actually, I am sitting at Conjunctured right now. Probably my last visit, can't really afford to renew the membership. Come on by, I have visitor passes.

I sent you an email to the n2neuron.com address a moment ago. Are you going to be at Conjunctured much longer?

Yes, I once had a failed startup, and ended up with $40K in credit card debt.

I assume you are personally liable for the business credit card debt. (As you generally can't get a business credit card without personally guaranteeing it). So, just to be clear on your situation, you are 30K in debt. (Regardless of what happens to the "business", you, personally, have 30K of debt).

Step one is to get yourself stabilized emotionally and financially. Good job on selling your car and moving out of your apartment.

These four servers that are sitting idle? Are these the ones that cost a total of $600/month, and you are contracted to keep paying $600/month through the end of January? (Am I clear on the situation?) Go and talk to the hosting company (the company you owe the $600/month to). In person. Not email, not phone, go sit down with a manager in person. Ask for mercy. Lay out the facts of your situation, just as you've done here. Say, "I know I owe you $600/month, and legally you have a right to that out of my last $6k check. Since I'm in this bad situation that I didn't expect, I'm asking if you would have mercy on me and let me out of my contract. Is there anything you can do to help?"

Next, write down a minimum monthly budget that contains the bare necessities: food, gas for the car, small gifts for your parents and friends to thank them for letting you bum off of them, the minimum payments on your credit cards. I mean this literally, write it down. On a piece of paper, or in a spreadsheet. You need to be able to look at the number, "$X/month", and say, "I can survive on that". Temporarily. While you catch your breath, and decide what next to do.

Next, I recommend you stop using debt as a tool to build your business. If you have a great money making idea that needs some capital, go get investors. Yes, you will pay the investors more in their share of the business than you would on interest payments, but you're making lots of money anyway, so what? And if the business fails, you walk away free and clear.

From a business point of view, the problem with debt is that is deadens the signal that you'd otherwise be hearing that you're on the wrong track financially. It's like some who suffers from leprosy, who loses the ability to feel pain in their extremities. The greatest damage comes not from the leprosy itself, but that people accidentally wound themselves (leave their feet in the campfire or something), and don't notice because they don't feel pain. Run your business on a cash basis, and you'll feel the pain of not being profitable right away, and make course corrections immediately. Run your business of debt, you rationalize things like you "have to" pay for ads upfront and invoice in arrears. Then you don't notice you've gone off course until you've gone over the edge.

You have a lot of ideas for things you can do now, and that's great! Find one that is going to be cash flow positive from the beginning. For example, those customer sites you could finish, or that product you could launch? Talk to people and bang on doors until you find someone who will pay you in advance, at least that portion which will be enough to pay for your minimal monthly budget for however long it will take you to get the project done. If your idea is good enough, if someone really wants it, they will pay upfront. If not, that's a signal that you need a better idea, something that your customers actually want. Don't go further into debt so that you can ignore the signal, instead pay attention to the signal.

OK, the 30K in debt that you're in now? Don't worry about it. Pay the minimum payments, and forget about it. Don't go further into debt, but for now don't worry about paying off the debt (aside from the monthly minimums) either. Sooner or later you'll get yourself back on your feet, make some money, and write a check to pay off the 30K. Until then, ignore it.

The CS degree? Don't worry about it. Employers and clients only care about what you can do for them. Now, if you haven't done anything yet, and you have a CS degree, then the CS degree is evidence that you're able to do things. (You at least made it through graduate school, and you're at least fairly smart). But you can show what you've done, and only a tiny, tiny percentage of employers or clients are going to care if you have a CS degree or not, as long as you can show them, as you can, what you can do.

But again, the very first thing to do is to put together you minimum monthly survival budget, and say, "OK. All I need to do, for now, is make this much to survive. I can do that". Once you do that, once you have your survival needs taken care of, then your stress lifts, your creativity comes back, and you will find it easy to start making money again.

Boy...I was ready to vote up this comment, but then I hit the part about not worrying about the $30k in credit-card debt. Instant down arrow. Absolutely TERRIBLE advice.

Whatever you do, you really must pay down the debt. Minimum payments aren't going to cut it -- this is revolving debt that you're talking about, and if you don't make more than the minimum payments, it's only going to get worse. People routinely go bankrupt by ignoring their credit cards.

Moreover, so long as you're paying tens of percent interest on your debt (as with most credit-card interest rates), every other investment that you make has to return more than your interest payments for the investment to be worthwhile. If you view a business as an investment -- just like a stock or bond -- then it makes no sense to start one while indebted unless you're sure that the return will exceed he cost of the debt. Otherwise, you're just taking careless risks with your finances, in the name of a more adventurous lifestyle.

Living frugally, you can easily pay down $30k in a few years at any decent job. Negotiate with your lenders, get the interest rate as low as you can, liquidate the corporate assets, and get rid of the debt. Starting a company is hard enough -- don't saddle yourself with the additional burden of serious personal debt before you begin.

I did that. I got a contracting job making $50/hour, worked for a year, grossed $100K ($50 an hour times 40 hours a week times 50 weeks in a year), paid off my $40K debt, paid $40K in taxes, and lived off of the remaining $20K.

So I want to be clear what my advice is... if you still think it's terrible advice, that's fine, as long as I'm not being confusing as to what I'm trying to say.

If I found myself in patryn20's shoes, or in my own shoes again, I personally would pay off the credit card debt before doing anything to upgrade my lifestyle. I'd stay bumming with my parents and friends, or, if that was starting to impact my productivity, get a really cheap apartment. No luxuries until the debt was paid off.

However, I wouldn't now make paying off the debt the very first priority. If I found myself in the same shoes again, I would not now stay in a contracting job just to get rid of the debt.

Absolutely I would want to see the debt going down. However I understand now the reason that is important is because it means that I'm now paying attention to the financial signals in my life.

The debt itself is only 30K, and if I paid even 30% interest on that, that's only 9K a year. That's not going to kill me.

What's important is the mindset, the understanding, that I'm now going to steer my business and my personal finances in the correct direction, and that I'm going to listen to the financial signals in my life instead of papering over them with debt. Get that right, and it won't matter if I end up paying off the debt in three months or two years.

For decision making purposes (such as, suppose patryn20 wants to start another business, should he do it or not?), I claim what's important is the time derivative of his net worth. Does the proposed business put him further into debt, making the derivative of his net worth negative? Then I would say, no, don't do it. If it is going to make money, leading to raising his net worth, and he wants to start a business, he's fired up about starting a business, he's excited by starting a business, go for it. I wouldn't base the decision on the net worth itself, I wouldn't say "don't go into business while your net worth is negative".

I wouldn't necessarily give the same advice to anyone. If someone had 30K of consumer debt from overspending, I'd be concerned at their successful ability to manage their business finances when they can't manage their personal finances. For such a person I probably would recommend getting a job and getting their personal finances under control (paying off the debt), before getting into a business. However patryn20 has a track record of a successful business, just in my opinion over leveraged, and right at the moment he reeling from a pretty hard blow. So my advice for him is different than it would be for a hypothetical person who was in 30K of credit card debt for a different reason.

I think it's great to have that kind of mindset. As I said, I thought the rest of your advice was great -- I just happen to vehemently disagree with the notion that you can let revolving debt ride while you pursue high-risk investments (i.e. starting a business).

Even if you're "only" paying $9k a year in credit-card interest, that's still $9k that could be invested directly into your future. And if you truly believe in your business, then why wouldn't you want to invest everything into it? Is it worth starting a business two years earlier, only to have $9k less per year to funnel into your dream?

More practically, you need every last dollar that you've saved to start a business. Few entrepreneurs can afford that extra $9k a year, and I doubt that you'll meet many successful business owners who will tell you that they couldn't have used additional capital. It really doesn't make much sense to invest in a business when you're saddled with consumer debt.

I just happen to vehemently disagree with the notion that you can let revolving debt ride while you pursue high-risk investments

Starting a business is not a high-risk investment (unless you put your own money into it)

And if you truly believe in your business, then why wouldn't you want to invest everything into it?

Because, excuse me for saying so, that would be silly. Think about my business separately from me for a moment. If the business needs money, the best place to get it is from people who have money, not from me who has little.

This reminds me of a JWZ quote: "Linux is only free if your time is worthless." The same principle applies here.

A business is exceptionally high-risk, if you value your time at more than zero. It's not like a savings account, where you put your money in, ignore it, and you're guaranteed to get it back someday. It's not even like a stock or a bond, where you have a framework to evaluate your investment, and can make prudent choices with a little bit of effort. When you start a business, you're investing your time -- your future earning potential -- into a vehicle that has a poor history of return, and no framework for evaluating the odds. That's as risky as it gets.

This point plays into your second comment: sure, it makes sense to get as much of your funding from outside investors as you can get on favorable terms, but it's naive to think that outside investors are going to save you from investing in your own company. Investors don't want to take the risk unless you have some skin in the game, and founders don't want to relinquish control before they need to do so. Thus, in reality, founders end up investing in their companies heavily. They're already committing their most valuable possession (time); it makes sense to double-down with money, too.

Have you read Founders at Work?

Yes.

Well, I think there's different kinds of risk, and mathematically from a financial point of view they may look the same, but it's not the whole story.

For example, suppose I want to take a year off and go hiking. I could have worked that year instead, made 100K, invested that in the stock market, and be a multimillionaire by the time I retire. So from a financial point of view, going hiking is a really terrible idea.

Or, suppose, I feel like taking that year and doing a startup. And suppose I have a 90% chance of failure. OK, you can run the numbers, and probably show that, on average, I'll do worse than if I took a job for a year. So, yes, looking at it that way, you can say that my starting a business is an "exceptionally high risk".

Except... what if I'm working on a project that I feel like working on?

A part of the interview with Steve Wozniak that I found quite fascinating was that he said he didn't feel like he was taking a risk with Apple. Sure, he could have worked all those extra nights and weekends and had it come out to nothing. Yikes! Invest all those hours, that he could have been working to make money, and end up with zero. But so what? He was doing something he wanted to do, that he found really exciting, building one of the first computers that people could own themselves.

Is there a danger that one will become overly caught up in a startup, and do foolish things? Sure. I been there. I've done that. If I had found the right mentor they could have advised me to bail on my startup a year and half before I did, and saved me a lot of grief. Does that mean that you "have to" or that it is "realistic" that you're going to wildly over commit? No. Just because most Americans are overweight and unhealthy doesn't mean that it is "realistic" for me not to have a moderate exercise program and eat healthy food.

it makes sense to double-down with money

hmm, I've already responded to this point, as far as I can tell. I'd be happy to expound more if someone wants a more detailed explanation, but otherwise I think I'd just be repeating myself.

>Whatever you do, you really must pay down the debt. Minimum payments aren't going to cut it -- this is revolving debt that you're talking about, and if you don't make more than the minimum payments, it's only going to get worse.

If you stop using the card, you will slowly pay down the debt by making minimum payments. You will end up paying a lot more in interest than you would if you paid it down faster, but it won't spiral out of control.

This is a really awesome write-up and lists everything I would have thought, but in a way I might not have been able to put acorss.

To put it succiently, 1. Cut down expenses, right now and ruthlessly. Negotiate with everyone on everything. Everything is open for negotiation.

2. Economic stress WILL KILL creativity. Your only focus right now should be get to positive cash flow. Not debt free but positive cash flow. Debt free will take time, but it will happen but what you need absolutely right now is +ve cash flow. Debt is ok as long as you meet minimum commitments. -ve cash flow will lead to economic stress which will kill creativity which will make it longer to go debt free.

3. Plan for Cash flow positive. On paper - In writing - Get someone to proofread.

4. If you are not able to get cash flow positive - get a consulting assignment or a job. START LOOKING RIGHT NOW.

5. If you are able to get to cash flow positive - look at your existing ideas-business lines and pick out the one which will create revenue fastest with the most amount of confidence. Work on it, and leave everything else for a while.

6. Don't go back to school. You know that is not a solution. There was a reason why you crossed into the free world.

I would take exception to "everything is open for negotiation" if it's interpreted that you don't need to honor your word and your commitments.

Also, a lot of the time economic stress forces you to make the changes in habit and self-discipline that allow you to thrive as an entrepreneur. CatDancer makes an excellent point that lack of profitability ("economic stress") is a signal to improve your business.

I don't think that is what he implied by "everything is open for negotiation".

What it does mean is that this situation makes you lose any bit of your laziness or ego or threat of embarrassment. Where as previously you may have been shy to tell your hosting company you can only pay $100 instead of $600, now you may have NO OTHER OPTION but to pay $100 instead of $600.

Of course the hosting company can refuse and pursue another route such as collection. But from my experience, most small businesses aren't looking to pick a fight if you talk to them genuinely and explain your situation. In hosting, this is even more true because it is a high margin business. ie. the $600/month you are paying may only be costing the provider $50/month.

We have weathered similar situation on more than one occasion in last one year. What has usually worked for us is to go "broke": tell the folks you need to pay that you cannot pay until x date or that you can only pay $y/month. Most vendors will work with you especially if you have been doing business with them for some time.

It's a fair point but I wouldn't characterize it as a negotiation. You are making a commitment to pay $100/month to pay off the debt. They can take you to court or a collection agency for not honoring your original contract but if you honor your new commitment they are very likely to be willing to work with you. But it's not a negotiating posture because you are reneging on an earlier commitment and asking for their forbearance.

Ridgely Evers wrote a great post about this back in March "Guiding Your Business Through the Recession" http://blog.netbooks.com/index.php/2008/03/24/guiding-your-b...

5. Conserve creditworthiness. Just like you don’t want to be your customers’ banker, don’t get into the position of being overextended with vendors, especially the ones you really depend on. This is often the opposite of what your instincts are--we all think our key vendors need us, which is true right up until they decide they can’t afford you as a customer. If you have to stretch payments, do it with ancillary vendors, and don’t wait for them to call you--tell them that you’re going to pay them later than you think you can, so you then pay them sooner than you said you would.

6. If things are tight, pay off all the little bills first. You’ll spend as much time and energy answering calls from the little guys as you do from the big ones. And remember the old adage: "If you borrow $1,000 and can’t pay it back, you have a problem. But if you borrow $100,000 and can’t pay it back, the lender has a problem." Your bigger vendors will work with you--they don’t want to lose you if they can help it. So pay off the little guys, and then communicate with the big ones openly and frequently. And pay something--it shows good faith, and makes it harder to cut you off.

"It's a fair point but I wouldn't characterize it as a negotiation."

I think you are just playing with semantics;) In general, trying to change your agreement with a vendor is negotiating in my books. Remember if I proposed $100/month, the vendor could well come back and make a counteroffer of $110/month. I might sleep over it. And then agree to it. I'd call that negotiation.

I can see value in Ridgely Evers book. But I see NOT negotiating aggressively as a bigger problem than negotiating too aggressively. Totally agree with Ridgely in that you have to have a sense of to what extent the vendor will go to accommodate you before it is not worth his time and investment.

For hosting, it is not too difficult to calculate that point. ie. say we are paying $3000/month for a high-end server. We know the hardware cost $6,000 to the host. We know we have been with the host for 6 months and paid them $18,000. We know, thus, that the host has already recovered the cost of the hardware. In addition, we know that the bandwidth at the datacenter costs the host no more than $500/month and the rackspace for our server ~$200/month.

With the server cost paid, we are costing the host ~$700/month and making them a rough profit of ~$2300. At this point, we may be tempted to start our negotiation by telling them we can only afford to pay $1500. Realistically, we can settle on $2,000...saving 33%/month.

All the numbers above are almost real from our recent negotiation with a host.

There isn't a quid pro quo in offering to pay less than you have already agreed to. He isn't promising them future business or renegotiating on a contract boundary, he is trying to stretch out payments because of cash flow issues.

I am completely in favor of negotiating aggressively, but I like my word and my signature on a contract to mean something, if only because that has value in future negotiations.

As to your situation I don't understand why you didn't negotiate a better deal up front if all of these numbers were available to you? Why not break out hardware reimbursement from bandwidth, rack space, and other services and work out a payment schedule that meets your needs and theirs in parallel with negotiations with other vendors? You have far more leverage when negotiating in parallel than when you are refusing to pay.

Why sign a contract and then renege six months in? The impact on your reputation (based on who else they may talk to or get called for a reference) and your next negotiation with this vendor has yet to be felt but I wouldn't rely on it being negligible.

"I like my word and my signature on a contract to mean something, if only because that has value in future negotiations"

Hey, now you are implying that my signature on a contract does not mean anything and that, that is how I prefer to run things. We are talking about ONE certain contract...and in this case, it involves a month-to-month contract.

As for negotiating earlier, again, you sound like you are reading from a college textbook. Nothing wrong with it, but I run a start-up and things are not usually as perfect as books may make it seem. ie. We did just as aggressive negotiation at the time of signing up and got the best deal in the market at the time. Also note that at the time the server was given to us, the host had put in money that they had yet to recover. When we went back to renegotiate, that cost had been recovered.

"Why sign a contract and then renege six months in?"

Usually because some unexpected variables change. Happens all the time, especially in a start-up. And right now, in this economy, even more so!

Lastly, your point that you should negotiate just as aggressively at the beginning is well taken. However, doing that and re-negotiating to get the best deal at all times are not mutually exclusive.

With no cash, you should do what will get you cash ASAP. That decidedly does not mean launching a product-- products take much longer to get off the ground and have some front-loaded cost. That leaves services-- i.e. consulting or lead-gen/marketing stuff like you were doing before. Hard to tell, but it looks like a low margin business (or you managed it poorly-- no offense!). If you were pulling in 70k per month at one point and ended up in debt... Doing more of that doesn't seem like a good idea. The best way to get out of debt is to get a job (don't let a lack of CS degree stop you) or (if you've got a good network and/or sales chops) do high-end consulting ($100+/hr).

Thanks for the advice, I really do appreciate the constructive criticism. I just want to explain the issue of margin and debt in regards to the business I was running.

The margins were ok. Ranged from 15% to 40% due to client acceptance rate on the leads. Clients in the industries I was targeting always reserve the right to reject leads and never want to pay in advance.

The problem came in with anticipatory purchasing. Let's say I need 45 graphics templates, 24 domain names, and capacity to host 1,000,000 daily impressions. I also need to buy premium CPM media for the next month on specific websites. You pay for that stuff up front. So, that runs you $12,000 (just a guesstimate). You have to do this stuff before you launch the campaign or issue a full invoice.

You launch. You generate leads, and at the end of the month you invoice for $35,000. But before you even invoice at the end of the month, you have to start purchasing for the next month. Targeted media buys, additional server capacity if necessary, creatives, and so on. If you are growing, you might spend out $24,000 in the second month.

You are generally two months out on spend if you are growing. If they are stable you are spending a month ahead. This means you will pay for one to two months of expenses before you receive the payment for an invoice in the first month.

If the business starts to shrink, you have to take a hit on pre-purchased creatives, equipment, etc. This is where I got caught. When things started shrinking, I had already acquired capacity and services I could not refund. As revenue each month declined, the ability to pay off previous purchases in full declined.

Once it seemingly stabilized, I was able to start predicting purchases again and continued acquiring placements and media for November and December. Then the clients pulled the plug.

Now, having already purchased and placed creatives for the last week of November and all of December, I am now stuck with paid for graphics with no clients and media buys that I can only get partially refunded.

Just thought I would explain how it is possible to be profitable while operating, but get stuck with debt when things get shut down.

I do have to say, if I do this again I will definitely insist on minimum notice clauses in the placement orders and service contracts. No more of this "turn it off" same-day, phone call BS.

I will get a job, and try to monetize what was left of the business.

Try again when the debt is paid and with some money saved. As someone pointed out: the knowledge of how NOT do it is very valuable.

You wrote: "The margins ranged from 15% to 40% [...] Clients always reserve the right to reject leads and never want to pay in advance."

That sounds like a terrible business to be in.

Really interesting stuff!

I dunno if the (fully) loaded margins are really 15-40%... The client is essentially heaping all of the risk on you. A good sales guy deserves a base salary, expenses paid for, and a "draw" (essentially, a non-refundable advance on future commissions). Your business was essentially a salesguy who was ONLY getting paid commission.

It's no surprise that you were able to sell a service like this. If you keep on it, I'd make darn sure that any client you take shares some minimal risk (i.e. your costs are covered if they bail, you get profit if they stay).

Seems like plenty of lead gen efforts (from yellow pages, to adwords, to salesguys) share the risk with both sides.

There is quite a bit of good advice here. I too was in a similar situation a number of years ago when my (as in I owned it) company was taken out by the post 911 meltdown. I closed out with more debt than you.

My suggestions (as someone who is not an attorney or a CPA) are:

1. Talk with the hosting company to get out of the contract. 2. Call all of your creditors, and tell them your situation. Ask them to help you and see if you can work out a payment plan. My creditors were surprisingly willing to help. 3. Get a full time job, work hard, and pay off your debt. 4. Keep your products on simmer until the time is again right. If you built a company once, you can do it again.

Being in debt sucks, and it took a number of years for me to get out of it; however, declaring bankruptcy will ruin your credit and be on your record for years to come. If you have that on your credit record, then creditors will stay away from you for years to come.

The economy is taking out companies left and right. Small and large alike. Just remember that nothing is insurmountable. Keep up your spirits, and keep moving forward. There is only one direction to move, ahead.

Joel Spolsky was in a similar situation when the last bubble burst. Maybe his example would be useful to you.

You must have had something that worked, if clients were paying you. Could you turn that into a product instead of a consulting operation? I.e. something larger numbers of lower-paying customers could use, without much involvement by you?

Plenty of advice here already. Insolvency can only be dealt with by liquidation and retrenchment on one hand, and bankruptcy on the other. It's an uncomplicated choice, and there's not much to say.

But, for the love of god, don't finance a business on credit cards. Bad idea. Really, if you can't find friends family or fools, there's always Uncle Sugar:

http://www.sba.gov/services/financialassistance/sbaloantopic...

In hindsight I would have used EC2 instead of buying servers. For servers I already have it pays to have clients using them and paying you more than your expenses on them.

Get out of the Credit Card debt ASAP. Instead of trying to sell the lead management system, go radical and open source it on an account on GitHub. You can then charge a high hourly rate for people who need help with it.

Focus on launching one site at a time, work on it until you are done. Consider using PivotalTracker for planning each project.

talk to your tax person

You really want to pay off that debit out of pre-tax monies. (well, unless you are declaring bankruptcy, but your debit seems small for that.) Either way, a $100/hr tax dude seems expensive, but it's not as expensive as paying off that debit out of post-tax money.

Like others have said, I would contact the server company and do what you can to cease the contract. I personally think the advice given of 'turning up in person and begging for mercy' is a little odd and I wouldn't do that. I'd call up, ask to speak to someone about renegotiating the contract (ie someone who can make the decision, not the sales rep) and explain the business has gone under and that you would rather conclude the relationship now rather than be in a position not to be able to pay and have to have them join your list of creditors. That should pretty much do the trick.

Now, the one problem with that is that it means the product you've built will no longer be running, which means you can't sell it. However, I think it's a funny time right now for lead generation anyway and IMHO better to be out of the game for a little bit to see how things settle.

In the meantime, I would weigh up your best opportunities between consulting and getting a job - what will make you the most money (to pay off the debt). I'd also factor in what will keep you involved in the industry - ie might be better to go contract or a slightly lower paying job in lead generation/online advertising than to get a higher paying job selling insurance (just an example - point is it's something that doesn't move your career forward).

I would look to pay off at least the minimum payments, just to stop the debt from increasing - but really you should try to pay what you can off per month. The budgeting ideas are good.

Finally, I would tinker on your project in your spare time - as long as you feel you are moving forward with it and creating value. If it makes you feel miserable, which it might, I would leave it dormant.

We really don't know where we are with the economy right now and so playing a safe game for the next 6 months is vital IMHO until we know what things really look like -- then we'll be able to see the opportunities and begin to capitalize on them.

On a personal note, I just want to say I feel for you. I've never been in debt, but I've also never really embarked on a risk taking entrepreneurial venture like you did. I moved to Silicon Valley (from another country) to do it, and 2.5 years later I'm still scared to try it. Scared of the failure, especially economic.

My point is you have tried it, you have learned a lot and you have the life experience which many don't. I hope that simply empowers you to get back on your feet and try the next one. I wish I wasn't as paralyzed as I am as my window of opportunity, age wise, is closing.

Best of luck to you.

I don't know if this is the best advice, as I have no experience with being in debt. But I think I would just take on consulting jobs until I have a safety net again. That is assuming it is not too much of a problem to find contracts.

Hi,

Sorry to hear it's not working out. I hope things start to get better for you. You've done the absolute right thing by cutting your cost base down as much as possible. CatDancer and co have offered some really good things to think about so I won't repeat what they've already said.

The 600$/month till the end of January, check your contract. If there's no way out I would talk to the hosters (talk to an organ grinder, not a monkey) if you can't make the payments. Depending on how/where you incorporated you might be able to get out of it easier. I imagine you're looking at a worst case of $1800 till end of contract? If you can't get out try to negotiate an upfront early termination at a reduced cost.

The stuff with the Austin marketing guys - how long would it take and how much of your time would it take before you see a return? Is this going to be full time?

If your immediate stress is caused by a lack of funds and that your clients have evaporated then I suggest you find a way to make short term cash. If you can do this with a short term contracting gig then it's worth considering. You're not necessarily looking at paying off that 30k, you're looking at bringing up your own personal cash levels to a level where you can think clearly and work out what to do next.

Don't liquidate all of your assets if you think that you'll reuse them in your next venture unless the value of those assets will make a material difference to the way you live. You should be able to sell them to your next venture at a cost lower than buying new or reused assets elsewhere. Once you know what you're going to do you'll have a better idea of what to sell and what to keep.

Get a job and pay off your credit cards. Debt is miserable.

Hey!

I will concede that the ratio (debt/monthly income) = level of depression(scale 0 to 9, 0 being your situation 9 months ago, 9 being suicidal)

Firstly, get the emotional support of your friends and family. Seriously, get the emotional support of your friends and family. Initially, you needed their support, because dropping out of college and starting a company definitely is a ballsy and "stupid" move in the eyes of many parents. However, you need their support now more than ever, because you risk slipping into a massive depression.

If you can, live off your parents. Cut as many expenses as possible. Get a few jobs. I would say pay off your debt AS QUICKLY AS POSSIBLE. It will be the most emotionally taxing and anxiety-inducing factors in your life for a while. This could also manifest into severe depression which has all sorts of massively negative side effects which could delay paying off your debt due to mental exhaustion. A year of solid hard work would pay off most of your credit card debt.

I'm currently an entrepreneur in waiting. By that I mean my last credit card funded gig tanked (don't ever depend on people not doing what is exactly NOT in their own best interest) and I'm waiting until this 30% APR debt is off my back. I'm doing this by working a full time job and freelancing on the side. I cannot stress enough on how important it is to have that full time job. No matter what happens with my freelance gigs (I've noticed a lot of clients asking about 'payment plans' lately), my full time job has those minimum payments covered. Of course these minimum payments would disappear much faster if it wasn't for those student loans (just applied for 'Economic Hardship Deferment') so whatever you do, don't do something stupid like go back to school where you pay someone so you can do more work.

Get a job, pay off debt, and learn from your mistakes. Semper Discens.

Does "learn from your mistakes" include not funding a business with credit card debt? To me, that just sounds crazy...

Is there a chance that you could sell the company? Perhaps the lead management system that you built would make the company attractive. Even if you could engineer a sale that covered only the debt, that would remove the burden of a bankruptcy.

My best advice would (if you have okay credit) get a line of credit from your bank or a loan and pay off as much of your credit cards as you can. The interest rates from a line of credit are MUCH lower than the 10,20,30% interest your credit card company is charging.

You'll still need to come up with a minimum payment each month, but you'll pay less in the long run. If you're in good standings with your bank and your credit isn't terrible, you should be able to get one. Now, I'm not sure about how banks are lending with the financial crisis, but it's worth a try.

Not sure if it is an option, but see if you can go back to school. You get try to get some no interest student loans, and work to pay those off while you complete your degree. Given your experience, you should be able to make a fair bit of cash during slow semesters or over the summer. School is a great place to ride out tough economic times.

How did you find your clients and what kind of leads are these?

Any chance you could find some more clients that would be interested in the same kind of leads?

I have had an idea of a "Lending Tree" type website for leads. Leads would be generated, evaluated, given a score of how good the lead is, then people would bid on the lead. I work for a company that has customers who buy leads internally through partnerships with lead vendors like Cutting Edge Media.

Anyway, I have had this idea for years now and haven't done anything with it. Maybe you could work out an arrangement to sell a position in the company to those that you partner with to sell the leads to there customers.

The first thing I would do is talk to an expert about bankrupcy to see what my options are.

There's lots of good advice here but I want to chip in my two cents, because I was once in a very similar situation and my advice is different enough than what's already here.

Short backstory so you know I'm serious: In 02, I lost a client along with about $20k of unpaid work (long story), $15k in debt, NO money, my ex-boyfriend stole my car (worse than a stranger, ha - and no, I couldn't get it back), working all the time & money stress lowered my immune system, I caught a ridiculously bad case of mono and could barely sit up for 3 mos, leading my only paying client to threaten to sue me. My father couldn't help me at all with money and my mother is an evil bitch who had an extra car but wouldn't help me anyway. It sucked. It was by far the worst period of my life BUT there's a huge upside, too.

The first thing is: you can deal with this. You're smart, dedicated, and capable. This is just a temporary setback for you. You're already being proactive instead of wallowing in self-pity - way to go. It took me much longer to get to that stage.

As another commentor pointed out, only sell your things if the equivalent hourly rate works out. For most things, that's a "no" right now, since consumer spending is tanking. Keep your stuff. Don't pay to store it - but keep it somewhere. Unless you're like that savekaryn chick and spent it all on small, easily shifted designer purses. ;)

Second thing is: Call your credit card company(ies) RIGHT NOW and tell them "Look, it's lower my interest rate or I'm going to go bankrupt." This is the #1 mistake people in our situations make (after the racking up of debt, of course). Credit cards ARE negotiable. Allow me to repeat: CREDIT CARDS ARE NEGOTIABLE.

And right now, CC banks are especially vulnerable because of the shit economy and that means YOU, an actual customer who intends to make good, is GOLDEN to them. If you tell them you have no other option, they WILL lower your APR, which will do HUGE things for you.

If they don't respond to your approaches, try another (male?) friend or family member who can pretend to be you - who isn't feeling beaten down & can be assertive. If that fails, get a (reputable, genuine) debt counselor or lawyer. It's WELL worth the investment - it will return way more than 30% on your money.

Third thing is: pay off your debt quickly but DON'T KILL YOURSELF DOING IT. If you eat only ramen and work 18 hour days, you're going to be unmanageably unhappy (read: depressed, beaten down, and totally burnt out) and possibly physically ill, too. I tried both approaches, and the overworking one nearly landed me back in bed.

I got a f/t job - my first ever after being a freelancer since a teen, that's how low I had sunk - and that helped a lot because it greatly reduced my feeling of uncertainty. However, my first job was shitty and I was only able to stand it for 3 mos - by the end of which I'd lined up a better job and jumped to that seamlessly. Again, this falls under the category of "don't shit all over yourself just to pay off a debt." Better to go bankrupt, in my mind.

Fourth thing is: Hustle. I got my job by hustling. I got my second job, the better job I stayed with for a year to pay off my debt, by hustling. And I made extra money by hustling. What's hustling? Not anything illegal. But you've got assets, so work em!

What has the company gotten you? Software you developed? Know-how? SELL IT.

Ask EVERYONE you know if they have work for you - and, most importantly - if they know anyone who might have work for you. Refine your pitch, give people as concrete examples as possible. Stretch your skills to fields where you hadn't worked before.

Ask everyone you meet who is at least tangentially related to your work - politely - if they could use you, or know someone who does.

There is NOTHING wrong with this. People are reluctant to do it because it seems sketchy or exploitative, but that all depends on how you do it.

I got every job I ever had by asking, mostly people I had barely just met (last job paid me about $180k/yr so this is not just for small fish). You HAVE TO ASK, because most people - even ones who really could use your help - don't think about the possibilities until you do. And for the people who know you best, trust best, ask them to help you figure out ways to hustle better.

Now, for the rest of the know-how, consider training other people to do what you do. Consider writing an ebook or something, once you get on your feet. Your knowledge is valuable, and if you do a cursory look into the world of self-published niche topic ebooks, you'll find tons of people are making a couple extra hundred bucks a day doing it.

Remember that your time IS worth something - and probably quite a bit. Remember that what you do today with your time is like investing or spending your future income, too, not just for this month. This year or two or three of your life that you're going to take paying off your debt, you don't want to look back and have nothing at all to show for it but, well, less debt.

Invest in yourself and your future where it makes sense.

If you pay off your debt a bit more slowly, but stay sane and have built something that can help you in the future (an ebook or teaching web site, say), that's almost surely worth the extra interest. You just have to be sensible.

Also, pro tip from a girl who knows: never, ever, ever work for anybody again who won't make a 30-50% advance payment. Put kill clauses in your contract, so you keep those deposits. Otherwise you're "putting yourself on sale" and letting everybody know it.

Oh, and that upside I mentioned earlier? It's this: this is probably the worst personal situation you will ever have to deal with. And you WILL deal with it just fine. And after that, you'll realize A) how unimportant money is to your overall happiness, which paradoxically makes making money that much easier because you have its number (so to speak), and B) if you can conquer this, you can conquer ANYTHING.

Cheers and best of luck.

Amy

It's not a good idea to say the word "Bankruptcy" on the phone with a credit card rep. I'm told it triggers all kinds of Bad Stuff behind the scenes.

Not to mention, they want to negotiate with you. They have an obvious incentive to do so. You don't actually have to say the B-word - everyone understands the consequences of financial distress.

Use your talent and experience, and bend the rules http://en.wikipedia.org/wiki/Blue_Ocean_Strategy ... Or dunk for the next couple months waiting for the moment that will never pass...

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