It’s the middle of March, 2009 and I’m once again, writing a new past due notice to one of my clients, a business owner based on the west coast. Mirabella, the owner of a novelty item company, is now almost a year past due on the money she owes me for work I did for her last summer. I’ve known Mirabella for some time and we have many mutual associates to whom she also owes money. It’s almost a running joke among our circle of friends. I knew it was only a matter of time before she owed me money, too.
“But, you’re still taking a full paycheck,” I always argued when I heard her explanations on why she couldn’t pay back a loan to one of our friends.
Her excuse: “That’s personal money. It’s not the same account. It’s illegal for me to pay company debts from my own account.”
“Whatever!” I shrugged.
Last summer, I, like many before me, finally became one of Mirabella’s statistics. She now owed me money, not because I’d loaned her cash or bought groceries for her when she forgot her wallet, but because my company had done work for her company.
“Of course, you can wait to pay me,” I said. “But if you even pay a little each month, I’ll waive the late fees,” I explained. “How about $100 a month?” I suggested.
Predictably, I didn’t receive any payments, just an occasional call from Mirabella so she could explain that she couldn’t pay me because of this or that.
“I just want to kill myself. I double ordered a product from China for a client and now I have to eat it,” said Mirabella in August.
In September, there was a light at the end of the tunnel. “This retired man named Frederick is loaning me money so I can make payroll. I think he wants to date me,” said Mirabella.
In October, things were dire again. “McDonald’s is rejecting all my credit cards. I can’t even buy a sausage biscuit,” she whispered from the drive-thru as I listened to the cashier on the speaker tell her that her American Express card was denied.
In November, Mirabella had to dip into her personal money. “I had to write a huge check to my brother to buy back his investment,” she sobbed. “My family is making me do it. It’s his fault. He sucks at his job.” I found out later that her brother’s home was foreclosed upon, the one he was given by his mother. This is especially ironic since he works as a mortgage broker.
In December, things were looking up again. “My Cousin Chip came to visit me and gave me some bonds,” she said happily.
“Can you pay me, then?” I asked.
“I’m not cashing them. I’m keeping them for my retirement,” she said.
“Ah, Mirabella!” I sighed.
Finally, in early January of 2009, it seemed justice was going to be served. Mirabella called. She was angry, “The bank froze all my accounts. My personal account, too! I should sue them. They can’t do this. I’m a corporation!”
Mirabella became a small business owner so she wouldn’t have to answer to anyone but herself, pull a big paycheck to buy expensive designer clothes, and jet set across the globe. Her novelty company was founded on money given to her by her family. Although the company has brought in some money from actual sales, it primarily survives on loans from friends, mostly older men who have the extra cash, think Mirabella is sexy and cute, and enjoy her company. Mirabella’s real skill isn’t making money from sales, it’s making money from loans through her ability to win sympathy.
Mirabella had managed to make ends meet for several years the way many small business owners do. In addition to loans, she had secured several lines of bank credit and multiple company credit cards. Each month, when funds were short, she didn’t pay what she felt she didn’t have to pay; then moved money around by paying one bill with another line of credit, and so on. Her accountant, also a former boyfriend, did his best to help her company appear solvent and successful. He also continued to pay out her full paycheck, despite revenue shortfalls.
Although it’s fun to hang out with Mirabella and enjoy recreating in the illusory world she’s built around herself, I knew it would have to end someday. Seeing her fail was bittersweet. She can’t manage money, doesn’t pay anyone back, and deserves to be shut down. However, she is a friend, so I continue to feel sorry for her.
Then, one day in mid February, Mirabella called to say all was right with the world again. “Cousin Chip and I are starting a new corporation. He’s paying the start up costs and opening up a new bank account in his name.”
“What are you going to do about your old company?” I wondered.
She didn’t answer.
But, she did add: “I can’t pay you with the new company money. It’s a different corporation.”
Hmpf! This is what I get for doing business with friends, I thought to myself.
It’s now March of 2009, nearly a year since I did work for Mirabella. She called last week to say she had been skiing with an old boyfriend who is recently divorced and was now staying with him at his vacation home in Florida. Next week, she is heading to Europe with a different man who she thinks might pop the question. She needed advice on the closest spa so she could get a pedicure.
“Stop by and we can go to the spa near my house. Then, you can treat for both of us. Consider it a down payment on the money you owe me,” I suggested.
Mirabella was a no-show. Big surprise.
I have little hopes of ever collecting because Mirabella herself doesn’t owe me money, her “now old” corporation does. In her mind, it’s my loss.
In the United States of America, owners of corporations are protected from owing money their company owes. That’s one of the principal reasons you incorporate – to protect personal assets. By incorporating your business, big or small, you won’t lose your house, your car, not even your credit rating when the bill collectors come a-callin’. You become divorced from all fiscal responsibility should the company go south, despite how much your own irresponsibility led to its downfall.
In Mirabella’s case, when she ran out of money, she simply started a new corporation. If she’s unable to resurrect the old company, she can simply shut it down, cutting off any creditors. Mirabella’s big paycheck is safe. The new corporation doesn’t owe anyone any money, yet.
President Obama announced today in a press conference that he wants banks to open up the floodgates and extend credit in order to get our economy moving again. He plans to increase the amount the Small Business Administration will guarantee so that there is less risk for banks who award lines of credit to small businesses. However, there is still no increased accountability to ensure that companies will pay the money back. There is no examination of start up businesses applying for lines of credit to ensure that these are not run by people who ran another company into the ground, then hung a new shingle outside their doors in order to appear to be in good standing. (See the video of the President's speech at: The Huffington Post website.)
Lines of credit should come with plenty of strings attached. Corporations should be required to put all owner’s names on the bank loan to secure the debt. Each owner should have to pass their own credit check. If you were part owner of a corporation who failed, and the failure was not due to unforeseen circumstances, such as your company was destroyed in an earthquake, you should not be allowed to get a new loan until the old corporation's debts are fully paid.
If you receive a loan and your company fails while you continued to pay yourself, you should have to sell your Mercedes, yacht, or vacation home to pay back the bank. If you live in a multi-million dollar home while everyone else lives in an average 3 BR, 2 Bath $200,000 home, you should have to sell your expensive home and downsize in order to pay back old loans. No more of this, “protecting personal assets” bull hockey.
It’s no wonder banks are so nervous about extending lines of credit to businesses. They should be.
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