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When Lightning Strikes: Living With Bankruptcy

One Sunday afternoon in January, a 39-year-old statuesque blue-eyed blond wearing sneakers and a “No Fear” T-shirt stood on the sidewalk outside her retail store and watched her life’s work get carted away. For the sake of her privacy, let’s call her Tara and her store The Happy Gourmet. On a normal day, The Happy Gourmet would’ve been packed with local-food advocates opening their wallets to buy produce, meats, and cheese produced by local farmers and food artisans. Instead, it was filled with tool-bearing bargain hunters gruffly dismantling anything worth taking, including wall-mounted vintage shelves and antique tin-roof tiles. They carted away café tables, blackboards, display cases, electronic scales and freezers. People out for a Sunday stroll along Main Street saw the action and joined the fray, stuffing shopping bags with hard-to-source gourmet goods, decorations, napkins and even the small encaustic paintings of garlic and peppers, which were gifted to Tara by a local artist as an opening present three years earlier. Everything was being sold off at “best offer” prices. Cash only.

With the poise of a front-of-house restaurant manager, Tara oversaw the very public dismantling of her cherished business.

“How much for this shrink-wrap machine?” John, a regular customer, asked.

“Whatever you want to give me for it, John!” she replied, offering a wide smile, if a little forced.

He gave her $20. They hugged. She said, “See you soon,” and watched him drive away. Then, for the first time that day, she cracked. In tears, she walked down the street for a block or two to collect herself, then returned to the scene where friends and familiar customers continued to cart away her enterprise.

Everything she had built over the past 20 years—her dream business, reputation, professional credentials, celebrated status in the community for providing five full-time positions and contributions to the local economy through her procurement policy of buying local—was gone in less than three hours.

Tara’s business was wiped out by the 2008 global financial meltdown, along with over 3,000 other Canadian enterprises (3.1 per cent of all enterprises in Canada). Incorporating does not protect small business owners. The fact is, most small businesses are primarily financed by a combination of personal savings, credit card debt, plus business lines of credit backed by founder personal guarantees and assets like home equity or retirement savings, which means business debt is also personal debt. Incorporation status does not shield you from having to make loan or creditor payments in these cases. Furthermore, in those tight credit times, banks were pulling loans, not approving them, and Tara did not have the personal financial resources to obtain more credit to carry her business through the downturn. She says emphatically, “I didn’t want to go bankrupt.” However, her advisors looked at the books and short-term outlook and agreed it was the best course of action. Tara was caught, like so many others that year, with a dollar-store umbrella in a Wall Street storm.

“Going under happened so fast,” says Tara. “When it falls apart, it really falls apart.”

The Bankruptcy Experience

Filing for personal bankruptcy took her a day. And typically, “clearing the deck” takes approximately nine months. However, getting out from under the related business bankruptcy process under Canadian law, in her case, which involved liquidating company assets, and paying back business creditors with an agreed upon amount with post entrepreneur job earnings, will take up to five years. Incredibly, it then takes an additional six years to restore her credit history. For Tara, that means it will take her 13 years to get a fresh start.

Conor O’Neill, an insolvency lawyer at Fasken Martineau, says under Canadian law it’s particularly difficult to rebuild your reputation and expunge the blight on your financial record after bankruptcy. “I know a very accomplished professional woman in her mid-40s who had just applied for a high-level corporate director’s position,” he says. “The company did a background check and learned that she had filed for personal bankruptcy 20 years ago. It was still on her record. These days, most corporate and even non-profit bylaws stipulate that directors cannot have ever declared personal bankruptcy. No one wants a director on their board who is perceived to have mismanaged money. She didn’t get the appointment.”

Andy Fisher, a partner in the insolvency and restructuring practice at Farber Financial Group in Toronto, says the way Canada deals with business-related bankruptcy is getting better. “Things have started to noticeably change since 2008,” says Fisher. First, the banks are less and less aggressive about pushing business owners into bankruptcy, since many had to provide personal guarantees to secure their start-up loan. Instead, they are encouraging founders to pursue long-term repayment plans known as a Division 1 proposals (if you owe more than $250,000) or Consumer proposals (if you owe less).

Chad Kopach, a litigation lawyer and partner at Blaney McMurtry LLP, agrees. “Canadian business owners are also getting more proactive in working with their lenders to work out a reasonable solution,” he says. “In a proposal scenario (similar to Chapter 11 and Chapter 13 in the U.S.), unsecured lenders will get some [money]. In a bankruptcy (Chapter 7 in the U.S.), they get none. It’s an easy choice if you are a numbers person.”

However, the proposal option only works if you have some money left to distribute on judgment day (the day the court decides how much you have to pay back, the conditions and when you may be discharged) or have prospects of getting a reliable job and income in short order. For many business owners, their business is their job. Many entrepreneurs, especially women, start businesses because they have experienced employment barriers or pay equity issues in the past, so finding a new, well-paying job that covers living expenses plus paying off business creditors at a set amount for the next five years is no easy feat.

Is there any upside? Fisher notes that for many, filing for bankruptcy is often the only and best way to get a new start for those deep in a financial hole that they might otherwise never be able to climb out of, and that in many cases the discharge process takes 12 to 18 months if there are no complications. He also says, “While it is not uncommon for people who have gone bankrupt to feel embarrassed, they shouldn’t. I’m certain that everyone who reads this article has a friend or family member who has either gone bankrupt or filed a proposal. We had a couple who went bankrupt. They went to a dinner party. Going to the dinner party, they thought they were the only people at the party that had gone bankrupt. At the end of the party, they found out that all four couples at the party had gone bankrupt or done a Consumer proposal.”

Consumer proposals have indeed been on the rise over the past five years and are increasingly seen as a better alternative to bankruptcy by both debtors and creditors.

However, Elizabeth Warren, author of the 2002 Harvard Law School study “What is a women’s issue? Bankruptcy, Commercial Law, an Other Gender-Neutral Topics”, casts dispersions on the bankruptcy industry’s effort to market bankruptcy as completely normal, as if “the courts are overflowing with people who deliberately shrug off their debts as easily as they shrug off an old overcoat.” In her view, it smacks of moral degeneracy.

Is Bankruptcy a Women’s Issue?

Studies show that four of the top causes of business bankruptcy in North America are undercapitalization, management inexperience, over-extension of credit and economic conditions or recessions. Furthermore, typically women-dominated industries, which women entrepreneurs also often gravitate to, including retail, accommodation and food industries, tend to top the list when it comes to high bankruptcy rates.

A continued look at gender and bankruptcy research suggests that bankruptcy, especially small business bankruptcy, is indeed a women’s issue. In North America, women are attempting entrepreneurship at unprecedented rates, despite the additional gender-specific challenges. Some women are opportunity-driven, others are driven by glass ceilings and sexism in corporate environments, financial necessity or because they see entrepreneurship as the best way to tackle the pesky and enduring gender pay gap. While the number of female founders grows at double-digit rates, evidence also shows that North American women entrepreneurs face reduced access to investment and commercial loan capital, resulting in a higher level of reliance on credit cards and personal savings to start their ventures. If five to 80 per cent of new ventures fail within the first five years, and if women entrepreneurs statistically take on more personal debt and financial risk to start their ventures, then it stands to reason that women entrepreneurs could be at higher risk for bankruptcies than their male counterparts.

Warren’s research paper, which focuses on personal bankruptcy, notes that “the number of women filing for bankruptcy is increasing at an alarming rate, and that the distribution of those in bankruptcy is shifting, from decidedly male in the 1980s to decided female in the 2000s”. Interestingly, this increase coincides with the dramatic increase in the number of female entrepreneurs over the same period.

When the Process Does More Harm Than the Credit Rating

The time it takes to be completely cleared of a bankruptcy, plus make repayments for several years is hard enough, but Tara says the process, what she has to endure while under bankruptcy and how she feels about having to do so is arguably even worse.

Once her business declared bankruptcy, Tara was required by law to hire and pay for a trustee. Trustee fees are governed by law, but generally involve a $750 one-time fee plus 20 per cent of any money collected. The trustee gets paid first, and whatever is left each month goes to the creditors. For the duration of her financial purgatory years, Tara’s trustee acted as a sort of financial parole officer. Tara is thankful that her trustee is respectful; still, she has to meet with him regularly to review her income and spending—in coffee-cups-per-day detail. If she earns more than $2,100 per month in gross income or approximately $25,300 annually (just above the regional poverty line of $19,930), which is the maximum allowed under bankruptcy law, she has to write him a cheque for the excess. She faces questions like, “Couldn’t your friend have paid for dinner?” and “Can’t you find a cheaper hairdresser or maybe use drugstore colour?” She even has to declare cash gifts from friends and family, and if it pushes her over her minimum allowance, it also gets appropriated. She had to forfeit her credit cards on day one and is barred from securing any type of credit until she’s discharged. If she is offered even a department store card and it is accepted, she could be jailed.

Five years into Tara’s bankruptcy term, her car broke down and was beyond repair. She was desperate for a loan and surprisingly, her trustee approved her loan application. However, the interest rate offered by the only willing lender was 29 per cent annually, a typical rate for “high credit risk” customers. She turned it down. She is now borrowing a car from a family member.

Overall, the experience has been, in Tara’s words, “humiliating and devastating psychologically.” She says, “For the first year I felt really raw. I developed a real fear of people. I didn’t want to go out, go anywhere, or talk to anyone. I felt shame. Panic. Utter fear.” She recalls how close friends were quick to knock her off their guest lists. Her European immigrant parents were ashamed. Her seven-year-old daughter endured teasing from classmates. Personal bankruptcies are easier to hide; but prominent business-related personal bankruptcies, not so much.

Researchers in the entrepreneurship space would not be surprised by Tara’s emotions. Canadians are smitten with the idea of entrepreneurship as a career choice, but are also known to have a strong cultural aversion to failure and those who are perceived to have failed. Not a good combination for a nation that seeks to be a global leader in the innovation and entrepreneurship space.

It’s been six years since the closing of her dream business. Tara has one year to go before her payback terms are fulfilled. Heroically, she rebuilt her professional life and now teaches full-time at a chef school at a local college. She was recently promoted to department coordinator. Her students love her grit and real-life experience. They learn more from her than just cooking. In turn, Tara believes sharing what she has been through, the good parts and the bad has made her both a better teacher and accelerated her own healing. She has also taken up jiu-jitsu, where falling down and getting up is part of the drill. However, she still avoids socialising outside of work and is deeply wary of ever starting a business again.

“The pull is still there and probably always will be,” she says. “I can’t walk by a storefront for lease without dreaming. Deep down, I guess I am still an entrepreneur. But there is no way I am going there again anytime soon.”

 


Suggested reading:

Slow Growth, Or How To Sleep At Night When You’re Building Your Business, by Valerie Hussey, LiisBeth

Should I put my small business into bankruptcy? by Andy Fisher of Farber Financial

What is a women’s issue? Bankruptcy, Commercial Law, an Other Gender-Neutral Topics by Elizabeth Warren, Harvard Women’s Law Journal, Vol. 25, Spring 2002

How Can I Get a Guaranteed Small Business Loan With Bad Credit? by Malik Sharrieff, studioD

 

 

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Curated

8 Financing Resources for Women* Entrepreneurs

All businesses need money to turn the wheels. Here are eight venture funds that target women entrepreneurs.

Article written and submitted by Ellie WainainaKenyan Freelance Writer

It’s 2016 but women still struggle to obtain financing for their businesses. Research shows that companies headed by men will receive over 95 per cent of all investments made in business. Given it’s 2016, this is highly disappointing.

Perhaps one of the major reasons why funding for women-owned businesses is so difficult to obtain is the number of women in senior positions. Women only make up 15.4 per cent of CEO positions and hold 33 per cent of senior management positions. Fewer women in senior positions means fewer women with the means to become future angel investors or partners in investment firms.

Based on the law of averages, men are more likely to find it easier to get the financing they need from investment companies than their female counterparts.

As a female entrepreneur, starting and operating your business may end up being an uphill battle. However, you can get the financing you need by taking advantage of financial resources more readily available for women. Here are some of the resources:

 

1. The Eileen Fisher Women-Owned Business Grant Program

The Eileen Fisher Women-Owned Business Grant Program awards $120,000 for up to 12 recipients each year. Therefore, the minimum you can get from this grant program is $12,000, which will greatly help your cash flow. To qualify for this grant, your business should:

  • Be majority-owned and majority-led (51 per cent qualifies as the minimum).
  • Have revenues of less than $1 million the year preceding your application.
  • Have been in operation for three years prior to your grant application with financials to show.
  • Be founded upon the goal of creating social and environmental change.

Applications are open every year in April and May.

2. Kabbage’s Online Loans

Kabbage is an A+ rated online lender that cares more about the health of your business than your gender or even credit history. If you have been in business for at least one year and have $50,000 or more in revenue, Kabbage is a good financial resource to explore an open line of credit.

In order to enjoy the benefits of financing from Kabbage, you will need to open a free account, then link to the online services that you use to run your business, such as Amazon or PayPal.

Once your application has been viewed and approved, you will get access to the line of credit that you need. The loan amounts range from $2,000 to $100,000. You will then be able to access the money on the go—whenever you need it.

You will have the choice of getting your loans on either a six-month or 12-month plan. In order to qualify for the 12-month plan, you need to borrow at least $5,000. The interest fees vary from 1.5 to 12 per cent, which is quite reasonable.

3. Plum Alley Crowd-Sourced Funding

What better way to find financing for your business than from other female entrepreneurs who know what it’s like to struggle?

Enter Plum Alley. This is a crowd-funding site with a difference. It specializes in helping women obtain financing for their businesses from other women or men who want to advance the cause of women in business.

In order to obtain the funds, you will need to open an account, create a project on the platform by providing basic details such as your location, funding goal, and category in which your business belongs. There will be instructions along the way to help you create an effective campaign to get you the financing you need.

In exchange for the money you’re given, you will offer rewards to your investors. This can be anything from a thank-you note to a pre-purchased product that you create with the financing you get.

You definitely should consider crowdfunding via Plum Alley if you are looking to avoid punitive interest rates associated with loans, but are willing to give away something for free.

4. The Union Bank Business Diversity Lending Program

While there are traditional lending institutions that will make it difficult for you to access funding for your company, Union Bank is not one of them. Through Union Bank’s Business Diversity Lending Program, you can access financing of up to $50,000. You can apply online for this loan if you run a woman-owned business and actively manage at least 51 per cent of it.

In order to ensure that your business has access to the diversity loans, your business should have annual sales of less than $20 million. The company you own and manage should also be two years or older and have borrowing needs of less than $2.5 million.

Once you have determined that you meet all the set requirements, you can go about applying online for your business loan.

5. 37 Angels Funding

While the odds of you making it to Dragons’ Den are very low, you can still access investors via 37 Angels, which specializes in seed stage investing. Because it’s made up of over 50+ women investors, you have a higher chance of getting the financing your woman-led business needs to operate and expand. You can then pay it back with interest or offer equity to the investors.

In order to have a shot at getting funding, you need to use the Gust platform to pitch via video. The 37 Angels investors will then call you to determine if your business is a mutual fit.

If that’s the case, the company, as a network, will invest anywhere from $50,000 to $150,000 into your business. Angel investors in this network can also help you raise between $500,000 to $1 million.

The decision on whether 37 Angels will invest in your business or not will come through in four weeks, which is a relatively short time. To increase your chances of getting positive feedback, be sure to apply when your business earns $50,000 to $500,000 in revenue. It will be much better for you if your company is valued at $2 million to $6 million, and if you’re able to make the pitch in person in New York City.

6. Kickstarter’s Crowd-Sourced Funding

If you are looking to dip your entrepreneurial toes into the creative arts or technology industry, then Kickstarter is the online funding resource you should explore. Kickstarter is one of the largest crowd-funding sites online. In 2013, Kristen Bell, the star of the Veronica Mars TV series, and director Rob Thomas, took to the platform after getting rejected by Warner Bros. Through Kickstarter, they sought alternative funding for the Veronica Mars Movie Project and requested people to help fund the film.

Guess what? People did!

The Kickstarter project ended up raising over $5.7 million from more than 91,500 backers. The fact that the movie ended up being made is a testament to the power of crowd-sourced financing for entrepreneurial projects. So, what’s stopping you from doing the same? Why shouldn’t you enlist the help of internet strangers to fund your business dreams?

Make sure you take the time to familiarize yourself with the Kickstarter platform. Sign up, create a project, and determine which category your business lies. Then go about writing details about your business product, state your funding goals and deadline, and wait for donors to fund your entrepreneurial ventures. Most successful projects tend to raise under $10,000, so no dream is too small.

You can offer rewards in return for funding that is given to you. It could be something as simple as a copy of the product item you end up creating, or something intangible in the form of unique experiences.

You will only be charged a fundraising fee for a fully funded project, which is always a good thing if you fall short on your financing goal.

7. Walmart’s Global Women’s Economic Empowerment Initiative

Your business doesn’t have to be in the U.S. for you to enjoy funding resources from that country. There are financing programs like the Walmart’s Global Women’s Economic Empowerment Initiative (WGWEEI) that will stand you in good stead.

The WGWEEI aims to source at least $20 billion from women-owned enterprises in the U.S. and abroad. It also aims to launch and operate a dedicated marketplace for women-owned products.

Perhaps the most noteworthy aspect of the Walmart empowerment initiative for women is the grants that will be made available to you. Walmart aims to provide $100 million in grants toward women-owned businesses over a period of five years starting from 2011. Though this is the tail end of the initiative, you still have a chance to get on the funding boat.

If you have a business that will empower women in your country, and that country is covered under the WGWEEI, then you qualify for Walmart grants. Grants can range from $250 to $250,000, so there’s money to be had for your business if you require financing. However, you have to submit a final impact report when applying for grants. Be sure to read the updated guidelines before you take any step in that regard.

8. Requested Donations from Reddit or Similar Sites

Just as there are many ways to skin a cat, there are also as many ways to obtain financing for your business.

Take Reddit, for instance, one of the most popular online social forums out there. In March 2016 alone, the platform had over 243.6 million unique visitors from 212 countries. That’s impressive! Prior to 2009, whenever Redditors wanted to share their images, they would use all manner of platforms to do so, which resulted in compatibility complications. That was until one Alan Schaaf decided to do something about it. He created Imgur, an image hosting and sharing site that was compatible with the Reddit platform.

Originally, Imgur was meant to be a gift for the Reddit online community. However, Schaaf got serious with what he had deemed a side project and decided to develop it further for all internet users. Money was an issue. But because Imgur offered a service that Redditors really appreciated, they donated money to keep the site going until Schaaf was able to get financing from Andreessen Horowitz, a $4 billion venture capital firm. And that is how the modern version of Imgur was born.

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Are you wondering why this story is relevant? It’s simple really.

If you have an idea of how to meet the needs of a large group of people, financing should not be a problem. Just the thought that you will be able to solve a major problem is enough to inspire people to finance the development of your product.

Online communities like Reddit are a good place to test your entrepreneurship skills. The very people who donate funds to your growing business will also provide constant feedback for your product. This should help you refine that product until you have something good enough to present to major venture capitalists for more financing. Alternatively, you can use the donations you get from Reddit or other similar platforms to operate your business until you can monetize it effectively.

If you have an online product that will appeal to large audiences like Reddit, don’t be afraid to ask for donations. The worst that can happen is you will get no for an answer. That’s not a life and death matter, is it?

Just because the odds are against you as a female entrepreneur does not mean you should give up. Each day is a new day. As time goes by, the financing options for women in business will continue to increase. You should, therefore, take advantage of every funding resource that comes your way to start, run, and expand your business. The aforementioned resources are just the beginning.

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