Cabinetmaker employed in a furniture manufacturer for many years, Sylvain decided to go on his own. Without experience as an entrepreneur, he makes a few mistakes that will put him in a precarious position.
The quality of the furniture produced by the cabinetmaker and their relatively low price brought him a large number of orders. What might seem like good news at first glance, however, will create some difficulties. Sylvain had already taken out a loan of $ 30,000 to buy his equipment. With the influx of applications, he obtained an additional line of credit to acquire tools and equipment. Without even realizing it, this margin allowed him to absorb the losses incurred by the company every month. By the end of its first year of existence, its working capital was dry and its $ 35,000 line of credit fully utilized. He even used his personal credit cards for an amount of $ 15,000. The icing on the cake: he was unable to remit the sales tax of $ 20,000 due to lack of cash.
A deficit balance sheet
Sylvain therefore tried to find a solution. Owner of the family home with his wife Diane, he had the idea to use part of the equity in the property to bail out his business. Doubting the effectiveness of this strategy and worried about losing his house, his wife instead recommended that he meet with a business recovery specialist to take stock. Jean Fortin et Associés’ commercial insolvency advisers quickly noticed that the problem was that Sylvain was not in control of his cost price. His business is constantly losing money because he does not sell his furniture at a price that can pay his costs and make a profit. On each submission, he even suffered a loss of 15% on average. Investing more in machinery to be more efficient would only amplify its debt problem instead of solving it. He would add fixed costs and interest, and Diane would also be liable for the mortgage refinancing.
Two decisions were made to help Sylvain’s business return to profitability. “Above all, he must increase his selling prices to a level that will allow him to operate with a reasonable profit margin. We will then have to wait a while to see what the impact will be on orders, ”explains Pierre Fortin, Licensed Insolvency Trustee and President of Jean Fortin et Associés.
Another measure to be implemented quickly: to ensure long-term financial viability, Sylvain must absolutely reduce the burden of his debts. “One of the worst mistakes of people who have financial problems in business is to invest more without fixing the source of the problem,” says Pierre Fortin.
Since the business is not incorporated, Sylvain was able to file a consumer proposal for the total unsecured debt of $ 70,000, which includes the line of credit, credit cards and unpaid sales taxes. In the event of incorporation, however, he would not have been able to include the debts of the company in his personal proposal.
Its cabinetmaking equipment having been given as a guarantee, it cannot therefore be part of the proposal.
The cabinetmaker will pay $ 750 for 60 months, without interest, for a total of $ 45,000, and will thus be released from his debts. In about a year, he will see if his new pricing structure has an impact on sales, and will be able to better assess the risk of purchasing additional equipment.
- Apart from the equipment, the only asset that Sylvain owned is his main residence. If the house had been sold, with the estate agent’s commission removed, his share would have been around $ 38,000. When a person’s primary asset is the undivided half of a residence, creditors know they have very little recourse to recover the book value of that residence. Therefore, they are usually willing to compromise and accept a reasonable consumer proposal, even if it is less than the amount owed and is payable over several years.
- A consumer proposal is not without consequences on the credit report. Sylvain’s will display an R-9 rating, the worst, for the duration of the proposal. Then, for three years after the end of it, the R-7 rating. But at least he will be able to continue his cabinetmaking work and hope for better days on a more solid foundation. Everyone has the right to a second chance and Sylvain now has everything he needs to succeed.