Expert: Christine Janklow - 1/11/2007

Question
I have a question regarding debt management versus productivity. Here's a little background:

My father has been a sole proprietor for over 15 years, and in that time has accumulated over $30,000 of debt with a business line of credit, and several credit companies.

We have recently reached a point where we have to expand to be able to handle the work, or lose a significant amount of potential income. I evaluated his business and found many ways to make it more profitable (at least 300 more). But, to make the changes we need an investment of around $10,000. Thankfully, we just recently the largest order we've ever had that will yield around $30,000 of retained earnings.

Now, my father wants to use all of it to pay off his debt, and I think we should use some of it to expand.

Question: Is it better to pay off all the debt, and then hope that the faulty business plan doesn't get us back into debt, or manage the debt over a longer period of time, and grow the business?  

Answer
Michael:
First of all, thank you for your inquiry. Your father is very fortunate to have a son as concerned for his well being as you seem to be. As in life, business provides us with many opportunities to prioritize. Growth is critical to sustain a business, but of course any investment is risky and may take time to secure a return on investment. Paying off debt, particularly when interest rates are involved is always in the best interest of the debtor. The primary reason is because your debt to income ratio is a major factor to secure future credit. In addition, those interest rates can jump drastically if a payment is missed or other fees accrue, sending you over the credit limit. As for managing or "servicing" the debt, if you are only able to pay the minimum monthly payment over the long term, the debt will grow because you are primarily paying interest, not principal. The effects of this are as mentioned above, one oversight and fees, interest apply. Here is an option that may enable you to do both with the working capital you suggested will be available. Have you ever considered debt settlement? It is an opportunity to save money on the amounts owed, effectively paying off debts anywhere between .50 and .70 on the dollar including settlement fees. If you have a lump sum to work with, your debt can be eliminated rather quickly and leave you with substantially more of the earnings than you may have planned upon and have the debt paid off. If you would like more information on this please feel free to contact our offices at 800.630.9960.
Whatever you decide, it is advisable not to carry debt for too long a period, the only one that serves is the creditors.