Home' Trinidad and Tobago Guardian : June 1st 2014 Contents Client Situation:
Daniel, a 45-year-old chemical
engineer, and his wife Jen-
nifer own a small general
goods store in a small but
rapidly growing community
in east Trinidad.
Eight years ago, Daniel withdrew most of
his savings along with a small loan to purchase
two lots of land on a main road on which he
erected a structure to operate the business.
Residential lots nearby are fetching $60 per
His plan was to eventually build up the top
floor so that his family could live there, but
cost overruns forced him to incur more debt
so he rents a two-bedroom apartment for
$3,500 per month. He managed to compete
the first level and purchase some goods for
the store with the loan.
The goods he sells are vital to the neigh-
bourhood because his is the only store of its
kind for several miles, however customers are
increasingly dissatisfied because they cannot
get basic items that they need.
Daniel is so cash-strapped that he often
uses the day s sales to meet his obligations
and, as a result, he is noticing a gradual shrink-
age of inventory.
Out of desperation, he approached his bank
a third time for $50,000 to restock the business
but they advised that his debt service ratio is
too high at 51 per cent of his gross salary of
$18,000 and it will take him seven years to
be debt free.
The bank also advised that he has to submit
three years of audited financials (which he
doesn t have) if he wants to use the business
income to qualify for the facility.
Some of the products he sells are building
materials, which he marks up by about 65 per
cent. The business has minimal overheads,
especially as his eldest son runs the store
during the week and he takes over on Friday
evenings. His cousin, Tomas, is a builder and
estimated that the labour to finish the top
floor will be $50,000, which he estimated
might be one-third the cost of the project.
Daniel is at his wits end and is seriously
considering closing down, selling off everything
and starting over.
Daniel is really between a rock and a hard
place. The root cause of his problem stemmed
from his cost overruns and his miscalculation
of his capital needs for the business. There is
a high failure rate in small business because
Also, with construction, you must factor in
cost overruns and contingencies because of
changes in prices and unplanned events.
Daniel s situation has worsened as a result
of the escalation of short-term unsecured
debt, which forced him to siphon money from
his business before it had the time to gain
financial momentum to stand on its own and
provide him with a salary.
All is not lost because Daniel has a few
things that are working in his favour:
• He is still quite young
• The store provides an essential service to
• Increasing property values
• Access to building materials at cost price
• Low labour cost from his cousin
1. Improve cash flow
2. Construct top floor
3. Restock business
The challenge is how do we take his
strengths and help him achieve his objectives.
So what are Daniel s numbers?
Debts, cash flow & construction
We are told his debt will take four years to
clear and his monthly payments are 51 per
cent of his gross salary, which works out to
If we were to assume that his current loan
interest rate is say 12 per cent per annum (APR)
we could estimate the quantum of his debt
at just under $350,000. If we were to add
$150,000 for the construction, the debt would
then be $500,000.
But why would the bank lend him $150,000
if they were not willing to lend him $50,000?
The answer is in the type of debt he had and
the purpose of the new debt. The old debt
was most likely unsecured and short-term,
which carries a higher interest rate and a higher
If he were to offer the property as collateral
to fund the completion of the living quarters
upstairs, then the loan could be considered a
residential/commercial mortgage. Assuming
a 9.0 per cent interest rate over 15 years (age
45 to 60) his monthly payment would be
At this point, he will no longer be paying
rent and a high loan payment, which will sig-
nificantly improve his cash flow and his debt
service ratio (DSR: $5,071/$18,000 = 28 per
This means that he will no longer need to
take money out of the business to fund living
expenses. Further, the value of the land alone
not counting the value of the existing building
with improvements, is worth more than
$600,000 (non-commercial value: $60 x
10,000 sq ft).
From his seven to eight years in business,
Daniel has gained an appreciation of what
sells and what doesn t.
He estimates that if he had $50,000 worth
of stock he could breathe new life into the
business. Now if his gross profit margin is 65
per cent and---assuming he can turn his stock
over six times per year--- if he were to reinvest
all income inclusive of gross profits, he can
actually recapitalise the business just from
One hundred dollars marked up by $65
brings back $165 into the business. If these
funds are turned six times in a year, then at
the end of the year he could have $2,000.
So if he has, say, $2,500 worth in stock in
the first month, he could have $50,000 in the
twelfth month. Customers would be happier
and his income would grow from month to
(Details were modified to protect client s
Nicholas Dean (Cer-Fa) is a financial coach
and mentor who is the managing director
of the Financial Coaching Centre. He can
be contacted at:
JUNE 1 • 2014 www.guardian.co.tt SUNDAY BUSINESS GUARDIAN
FINANCIAL MAP | SBG17
Reviving a small business
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