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12 Replies Last post: Jan 5, 2009 9:41 PM by RelyAcctg

I am at a crossroad in life, please help.

Jan 1, 2009 10:08 PM

sboc2009 6 posts since
Jan 1, 2009

Hi,
I am a new member and i am ready to start my own business. It is a very scary thing but i am ready for it!

I have been in the car business for 10 years, i run a big dealership and know the ins and outs very well.
I really want to open my own used car lot and i have a few questions.

A good friend of mine started a lot about 5 years ago, he is doing very well and started off by using his credit card to buy inventory. He has a fixed 7% rate and a 50K limit. He pays approx 700/month on the 50K credit card bill and of that 700, 200 is intrest. 200/month to borrow 50K isnt really bad at all.
So when he sold a few cars, he took the whole amount of the sale and bought more cars (that he owns 100%). Then he gradually paid the card off within a year and now only uses it on higher priced cars he buys.

My question is this,
Is it wise to use this method to aquire inventory?

I can get a line of credit thru my bank but they will hold the titles. So if i buy a 10K car, i have to pay it off once its sold in order to get the title back. This will not free up very much money for me to buy more cars.

For instance if i would do the same thing with the credit card, i would have the whole selling price to put in the bank and invest in more inventory, and just make the minimum payment on the CC and pay it off a few months down the line.

Whats the difference between a Line of credit and a business loan? Would the business loan work in my favor like the credit card would?
Please help me shed some light on this, i know everything else about buying the inventory, working with the banks for approvals on car loans and everything else to run a car lot.
I just have to figure out what would be the best way to get funds for my inventory.
Thank you very much for your help and happy new year.

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RelyAcctg 5 posts since
Jan 2, 2009

1. Re: I am at a crossroad in life, please help. Jan 2, 2009 5:29 AM

I'll answer the difference between a business loan and a line of credit question. A loan is for a set amount and you are funded the entire amount of the loan at the onset. A line of credit allows you to take fundings of amounts at different times up to the dollar limit set for the line of credit. In effect, credit cards function as a line of credit, you do not need to use the entire amount of your credit limit, but should not exceed that limit.
I am not familiar enough with the auto industry to answer your question about the advisability of using the credit card method to finance (which was basically a form of having a line of credit), but I will mention that to obtain a credit limit that high he may have had to offer security for it, if not his inventory then possibly his home or some other form.
One other point is that I would be very careful about starting a business right now that carries an inventory. Consumers are putting off purchases right now until they find out what is happening with the economy. It may take some time for Obama to assume office and earn the confidence of the public and for the public to have confidence in the economy again. I would use this time to do all of the research necessary to start your business so that when the time is right you will be able to act more quickly and in an informed and capable manner. It would also be a good time to develop some business relationships with your bank and others and find out all of their requirements. Good Luck.

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LUCKIEST 7,933 posts since
Aug 6, 2007

2. Re: I am at a crossroad in life, please help. Jan 2, 2009 6:56 AM

I am at a crossroad in life, please help.

Welcome, It would be nice to know your first name. I am a SCORE Counselor and SCORE helps people in business or going into business FREE. You can visit SCORE in person or online.

When people come to us and want to use their credit cards to acquire inventory or start the business, we suggest both a Business Plan and even more important a Cash Flow Report.
WILL YOU HAVE THE CASH FLOW IN 30 to 45 DAYS TO MAKE THE CREDIT CARD PAYMENT??

Do you have an Accountant??, A Lawyer?? and an Insurance Agent lined up??

Best of luck, LUCKIEST

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sboc2009 6 posts since
Jan 1, 2009

3. Re: I am at a crossroad in life, please help. Jan 2, 2009 8:49 PM

in response to: LUCKIEST

Thank you for the reply.
Yes i do have a business plan, insurance and a accountant in place.
I just have to figure out what way would be the best way to buy the inventory.
The more research i have done (spoke with other used car dealers) the more im leaning towards buying inventory with a credit card.
I have enough money to pay for the rent and bills for up to a year by cashing out my 401k.
Any advice is greatly appreciated.

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NoBullFunding 278 posts since
Oct 6, 2008

4. Re: I am at a crossroad in life, please help. Jan 3, 2009 10:01 AM

In my opinion, using a credit card to finance a car dealership is risky. Credit card rates are variable, so if rates begin to climb your debt service will also increase. Also, if you miss a payment, the rate will skyrocket and you may end up with interest rates in the 20% range. Most dealers use something called a floorplan line, which is very much like a line of credit, but the rate is less volatile than a credit card (although they too are often variable rates).

If you want to make this happen, you should save some money and use thos funds to finance your business. The BIGGEST reason that small businesses fail is that they are undercapitalized. You need to make sure that you don't run out of cash in the first 6 months, because at that point it will be too late to get a bank loan to bail you out.

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ANurse 1 posts since
Jan 3, 2009

5. Re: I am at a crossroad in life, please help. Jan 3, 2009 12:23 PM

Greeting and a Blessed New Year's 2009

www.entrepreneur.com/money/howtoguide/article52742.html may be another site to look into. Luckiest
suggesting to seek help from SCORE is another good resource center.

Showers of blessing upon you in your efforts,
A Nurse that Dares to Care
Fanimo

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sboc2009 6 posts since
Jan 1, 2009

6. Re: I am at a crossroad in life, please help. Jan 3, 2009 3:01 PM

in response to: NoBullFunding

I can get a credit card with a fixed rate of 9% and not variable, the limit is 50K and i read the fine print, if i miss a payment there will be a latefee depending on how much money i have outstanding.
Floor plan is a good idea however i have looked in to it and it is pretty expensive, they charge you fees for this and fees for that, so it ends up eating up alot of cash in the end.
The guy that i know has a lot, he has a line of credit, credit card and a floor plan. He doesnt use the floor plan if he doesnt have to, only if he really needs to buy a car thats a little more then the "avarage cost" of the cars he buys.
I dont know, there are so many questions i have about the funding aspect of it. Basically i need to have a few sources that i can get money from to buy my inventory.
thanks for the help, keep it coming.
PS: Great site by the way, im very happy i found it!

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Bridge 364 posts since
Jun 3, 2008

7. Re: I am at a crossroad in life, please help. Jan 3, 2009 9:11 PM

Check your state licensure regulations too..many require an "operating lot" to get a license; i.e. inventory. In short, they have made it a good ol boys club...you need inventory and an "operating lot" to get a license (of course you can't sell before you get the license) and you need the license to buy wholesale....

Buying used cars for 10K seems like you might be starting a little on the high end. I have seen several very successful used car businesses start with much lower cost/car levels and gradually work their way up. Most carry paper on the cars, finance subprime buyers and make 18-22% on the financing as well.

Buy a car for $2,000 at auction, sell it for $4,000 with $1,000 - $2,000 down, they miss a payment take the car back and sell it again.

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Bridge 364 posts since
Jun 3, 2008

8. Re: I am at a crossroad in life, please help. Jan 3, 2009 9:43 PM

in response to: sboc2009

You will get killed in taxes if you cash out your 401K.

You should look into a self directed IRA (investing your 401 K into your own company stock) which would not have the tax penalty and/or using the 401K to secure a loan.

With credit card rates so low, it is not bad rate for an unsecured line.

I am not sure that many small used car dealer use floorplan financing as the other poster mentioned...

Best if Luck,

Greg

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sboc2009 6 posts since
Jan 1, 2009

9. Re: I am at a crossroad in life, please help. Jan 4, 2009 3:06 PM

in response to: Bridge

I know taxes will be harsh if i cash my 401k out but i dont have a choice.
My 401 would pay my house hold bills for a full year (house payment, car payment, insurance, food etc etc...)
I wont have a decent income for the first 8-12 months starting my own business, so i figured the 401 would help the home life while i get established and start making a decent living with the lot.

Good or bad idea?

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RelyAcctg 5 posts since
Jan 2, 2009

10. Re: I am at a crossroad in life, please help. Jan 4, 2009 4:01 PM

in response to: sboc2009

You will have to pay the tax rate for your income bracket plus a 10% penalty for early distribution of your 401k. In addition, you won't have that money for your retirement. The upside: you won't owe anything and if you have an operating loss in that first year of business (which is common), that will bring down your income and may put you into a lower tax bracket. An alternative would be to borrow money for these expenses, perhaps using a credit card with a fixed low rate. The upside: the interest rate would be lower than your tax rate and after you pay it off, you would still have your retirement fund. You can only put in $5,000 per year into an IRA ($6,000 if you're over 50), but you can pay off the credit card as fast as you want to. People are a lot more likely to pay their credit card debt than to get around to saving, so that makes the borrowing money option more attractive, too. Also, if you're quitting that job where you have the 401k, be sure to make a direct rollover to an IRA as there are tax problems if the money passes through your hands.
If you take a distribution of a 401k in the form of a check (direct deposit, etc.) with no known exception to the 10% penalty, then the fund is required to withhold federal tax. If you later decide to rollover the money (within 60 days) into an IRA, then you have to make up the amount withheld for taxes out of your pocket (it's considered income if it doesn't make it to your IRA) or you will have to pay taxes on the income for that amount and the 10% penalty on it. It's sort of a Catch 22 situation. The tax withheld is not lost, it's just added to the taxes withheld when you file your taxes.

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Bridge 364 posts since
Jun 3, 2008

11. Re: I am at a crossroad in life, please help. Jan 5, 2009 12:49 PM

in response to: sboc2009

Actually, you do have a choice, cobvert your 401 K funds into a self directed IRA; you get full use of the funds without any penalty....

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RelyAcctg 5 posts since
Jan 2, 2009

12. Re: I am at a crossroad in life, please help. Jan 5, 2009 9:41 PM

in response to: Bridge

Bridges, that would be true in the case of a direct rollover. It would not be fully true if the funds passed through your hands which would create the complications as I explained above.

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I am at a crossroad in life, please help.

Jan 1, 2009 10:08 PM

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