Local investing eases small business credit card debt

Editor’s Note:  This story is part of an ongoing series of essays written by the participants of Invest Local projects.  By presenting their stories in their own voices, we hope to build a better understanding of the importance of local investing through the lenses of the entrepreneurs, lenders, and supporters that make it possible.  

Karen Lawrence, owner of KLCreative Media, at the Staunton Earth Day celelbration.

Karen Lawrence, owner of KLCreative Media, at Staunton Earth Day.

By Karen Lawrence 

I don’t think my business start-up story is unusual.

I was under-financed and overly optimistic in my ability to turn a profit quickly. And even though I was aware that my personal situation coming out from under several years of upheavals, relocation to Virginia, and a new career direction was going to make financing a new business problematic, I took a leap of faith anyway. I felt I could beat the odds.

From 2008-2012 I worked a day job, did market research and began building a client base. During that time, I saw a significant need for the delivery of more in-depth technical assistance, particularly in marketing, than existing business organizations could provide. The creative entrepreneurs and small business owners I assisted had taken business planning classes, attended networking events and received sporadic consultation, but found themselves needing more personal, targeted assistance than was available.  The more clients I worked with, the more convinced I was that there was a hole in the marketplace my company could fill.

Confidence in the demand and the solid reputation and social equity I had developed in the community during those years made me believe I could reduce the amount of time it would take me to get noticed in the marketplace. Based on those factors, the market data I had accumulated and a conservative business plan with very few expenses built in, I made a guarded assumption that I could turn a profit after two years of full-time operation by using unsecured debt to supplement cash flow issues during start-up. While I had already acquired some debt already during the recent life transitions, I had enough of a credit line left to believe I could manage an increase without huge impact. Then once the business was showing profit, I felt I had the discipline and desire to reduce the entire debt quickly.

Going into my third year of business, I realize that while my assumptions about being able to turn the business profitable within two years were correct (Chart A, below), my assumptions about being able to pay off the unsecured credit more quickly were not (Chart B). It became a slippery slope of cash flow management and accruing interest I didn’t anticipate. While I have made significant effort to reduce this debt over seven years of on-time, above-the-minimum payment management, my debt has reached an all-time high. Between the tightening of the unsecured credit market, mandatory reductions in credit lines and the drying up of 0% interest offers that were allowing me some relief by juggling existing balances, I find myself succeeding in business yet deeper in debt than ever.

business growth chart 2008-14

Income vs. Debt

The financial chart below shows that as I transitioned from having “other income,” I also navigated the shift in the credit market and still managed to turn the corner on profits versus expenses, with a trend in declining dependence on unsecured debt.

Income-Debt Divergence

The good news is that as my business begins to turn a profit, not only is the debt-to-income ratio slowly reducing; there are also new options for relieving the hemorrhaging of interest to credit card companies. By taking advantage of opportunities in local investing, crowdfunding and the current boom in entrepreneurship, I hope to roll high-interest rate debts into lower interest rate loans offered by community members that want to support KLCreative Media’s work towards strengthening the local economy one business at a time.

The first boost came from friend Meghan Williamson who was willing to redirect IRA (Individual Retirement Account) funds to help me reduce my high interest credit card debt. She set up her self-directed IRA account, we sat down over lunch to talk about terms, drafted a simple loan agreement, and within a couple weeks I was zeroing out one of my cards. Meghan and I settled on an interest rate (3%) that would fully cover the annual fees of her self-directed IRA and which was significantly lower than what I was paying (16%), and we agreed to a low minimum monthly payment that would allow me to funnel higher monthly payments to the remaining debt. Her IRA sent me the check and I repay the IRA based on the terms of the agreement.

This is a win-win opportunity for lender and borrower and brings choice back into the equation. Why not put your IRA funds to work for people and places with values and community-impact that align with your own?


logoTo learn more about Karen and her small business, visit her website at klcreativemedia.com

If you’d like to learn more about Local Investing opportunities, either as an investor or an entrepreneur, please attend our Introduction to Local Investing workshop on Thursday October 23rd or check out our calendar for all other upcoming events.

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