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October 18, 2010 | Crain’s New York Business | 17

Over the past five years, how have the terms of your credit card changed?

What payment pattern do you use for your credit cards?

What is the interest rate charged on your primary credit card?

Source: National Small Business Association

SURVEY SNAPSHOTS: CARD-CARRYING MEMBERS OF THE SMALL BUSINESS COMMUNITY

Has your firm used credit cards in the past12 months to meet capital needs?

buck

enn

isSee CAUGHT on Page 20

THE DOUGH’S NOT RISING:Jen Houston and CharleyTucker of This Chick Bakesnow have a financialconsultant on board. “We’regoing to reach a point wherewe have to grow or stop,”Mr. Tucker notes.

BY ELAINE POFELDT

WHEN CHARLEY TUCKER AND JEN HOUSTON started PMS Kookie Kompany in2003 from his apartment on First Avenue, the cookie wholesalingbusiness seemed like an ideal way for the two East Village actors andmusicians to add to their unsteady income.

Ms. Houston had a knack for coming up with treats that satisfiedcustomers’ cravings, like the Pouty Peanut Butter Blast, a sort of giantpeanut-butter cup, and the Crampy Cashew Chocolate Chunk bar. Mr.Tucker found he was good at persuading local cafés to sell their treats,made from high-end chocolate, plus organic and natural ingredients.

After they hired a part-time salesperson in 2004, they built up a rosterof about 15 to 20 steady wholesale clients, ranging from Joe Coffee cafés toYork Theatre Company. They have now built that up to roughly 30.

Debt may crumble their cookie

They financed their bakery startup largely on credit card debt. Can this business be saved?

Debt may crumble their cookie

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20 | Crain’s New York Business | October 18, 2010

R E P O R T S M A L L B U S I N E S S

Even savvy small business owners can get tripped up by misconcep-tions about debt. Use this quiz to test your knowledge of business bor-rowing, devised with Nat Wasserstein, a crisis manager at LindenwoodAssociates, which has offices in Manhattan and Upper Nyack, N.Y.

Quiz: WHAT IS YOUR DEBT IQ?

1TRUE OR FALSE: Using a creditcard as the sole source ofstartup financing for a business

in today’s credit climate is a smartpractice.

FALSE. “It is very risky,” Mr.Wasserstein says. “Interest rates areat historical lows, and there is nodoubt they will be rising.” Creditcards are a viable last resort,however, if an entrepreneur doesn’thave a shot at getting bankfinancing.

2TRUE OR FALSE: Using apersonal credit cardresponsibly to borrow for your

business will help increase yourcompany’s credit standing.

FALSE. Your goal as an entrepreneurshould be to build thecreditworthiness of your business.“You can’t do that if you are using apersonal credit card,” says Mr.Wasserstein.

3TRUE OR FALSE: If you use abusiness credit card to borrowmoney, you are not personally

liable for the debt.

FALSE. In most credit cardagreements, the principal of thecompany is responsible both as anofficer of the company and as thepersonal cardholder, says Mr.Wasserstein. Even if the businessfails, you’re on the hook.

4TRUE OR FALSE: The best timeto borrow is when a business isgrowing.

FALSE. At that time, it’s oftensmarter to use a combination ofequity and debt for financing, Mr.Wasserstein says. That way, yourcash won’t be tied up as much indebt payments—and you’ll havemore flexibility to adapt tounexpected adversity, like the lossof a key customer.

—ELAINE POFELDT

The company, which has sincebeen renamed This Chick Bakes,now brings in close to $200,000 ayear, with Mr. Tucker and Ms.Houston working full-time along-side four part-time and seasonalemployees.The partners are consid-ering opening a retail store.

But there’s a problem.To financethe business, the partners borrowednearly $33,000 from Mr. Tucker’smother and a friend, about $30,000on business credit cards, and morethan $20,000 on personal cards.That debt has weighed down thefirm—and the duo’s personal lives.

The partners manage to make$800 in payments every month,which more than covers their creditcard minimums, but each takes only$1,000 a month in pay. They haveindefinitely deferred repaying loansfrom friends and family.

Some of the business credit cardscharge interest rates of close to 30%.

“I try to keep calling the banksto get them to drop the rates,” saysMr. Tucker. As for cash in reserve,well … “I own four or five guitars,”hesays. “They don’t amount to much.”

This Chick Bakes’ founders are

among legions of entrepreneurstrapped by the credit card debt theytook on to start businesses and keepthem going. Over the past 15 years,credit cards have become one of themost common types of small busi-ness financing. The proportion ofsmall businesses using cards for fi-nancing jumped from 16% in 1993to 59% in 2009, the National SmallBusiness Association says.

Egos, careers, money at riskindividuals often put their egosand careers on the line to launchbusinesses. Unfortunately, creditcards make it easy to run up bigdebts that hamper growth. Entre-preneurs may then find that keepingstruggling firms going is the onlyway to stay current on debts—evenif it might make sense to walk away.

A survey by the U.S. Small Busi-ness Administration released inJune found that while small businessowners make up about 12% of U.S.households, they owe about 25% ofhousehold debt. Nearly 80% of thatis secured by residential real estate,meaning that if businesspeople can’tmake their monthly debt payments,they risk losing their homes.

It’s tempting to borrow more oncards now,especially since the econ-omy is just beginning to look up andbank loans are still difficult to get.But such borrowing means that busi-ness owners have to reserve moneyto cover increasing debt payments.

“You’re always going to be usingdebt payments to fill a hole that’screated by growth from month oneto month two,” says Nat Wasser-stein, a crisis manager at Linden-wood Associates,“That hole will getbigger and bigger and bigger with-out ever being able to be repaid.”

That’s not exactly news to Mr.Tucker and Ms. Houston.“I’m wor-ried all the time,” says Mr. Tucker.

The two met in May 2002 at theOyster Bar in Grand Central,whereMr.Tucker, then an actor, was tend-ing bar, and they soon started dat-ing. At the time, Ms. Houston wasmaking a living by waitressing anddoing voice-overs for TV and radiocommercials. By November, thecouple was planning to start theircookie company.

“We said, ‘Instead of workingin restaurants, what can we do tohelp ourselves in the future?’ ” Mr.

Caught in credit card crucibleContinued from Page 17

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R E P O R T S M A L L B U S I N E S S

Tucker recalls.In 2003, he took out a low-inter-

est $25,000 loan from the ActorsFederal Credit Union,where he hadan equivalent amount of savings touse as collateral. The couple bor-rowed another $8,000 from a friendto finance operations and marketingefforts. Meanwhile, routine expens-es, like trademark costs, mounted—as well as some unexpected ones—leading them to their credit cards.

“We had a car stolen,” Mr.Tuck-er says. “We had someone back intoanother car and had no insurance. Ihad to pay for that. These tragedieswould wring us dry.”

To alleviate some of the loan pay-ment pressure, Mr. Tucker bor-rowed $25,000 from his mother,andrepaid his credit union in 2006.

The team had other challenges,like finding affordable kitchen space.They took the subway one night aweek to get to one kitchen in theBronx. “We’d carry all our stuff on arolling cart,make,bake and packageeverything,and get back on the trainat 4 a.m.,” recalls Mr. Tucker.

On top of this, they were squeez-ing in performances from their cre-ative careers.Ms.Houston, an ener-getic woman with long, flowingblack hair and a butterfly tattoo onher forearm,sang and danced every-where from cruise ships to touringrepertory theaters.When Mr.Tuck-er played Afghan warlord Mah-mood in the William Mastrosimoneplay The Afghan Women at PennState University, he commuted: Hehad to keep up his end of the baking.

The breaking pointas the pressures mounted, thepartners ended their romance aboutthree years ago.

“The company wasn’t doingwell,” says Mr. Tucker. “We weren’tdoing well.We were together all thetime,and everything in our lives wasabout this company. That’s whatstarted to drive us apart.”

They agreed to run the companytogether. “It’s like our child andwe’re divorced,” says Mr. Tucker.

Later in 2007,they came to anoth-er turning point. Mr. Tucker wantedto change the name of PMS KookieKompany to attract a wider customerbase.Ms.Houston liked the edgy hu-mor of the original name. Theybrought in a business consultant tohelp them compromise, and ulti-mately decided on This Chick Bakes.

It’s not always easy to run thebusiness together. Mr. Tucker ismoving in with his new girlfriend inthe West Village; Ms. Houston al-ready lives with her boyfriend in theFirst Avenue apartment where sheonce lived with Mr. Tucker.

“We are supportive of each oth-er,but as you can imagine,some daysare just awful,” Mr. Tucker says.

Taking only limited pay whileworking long hours has made it hardto move ahead with their lives.

“I sacrificed my acting career andthe things I came to New York to dofor this business,” Mr. Tucker says.“I had hoped to start a family.

“I don’t have any income,”he con-tinues.“We’re going to reach a pointwhere we have to grow or stop.”

Against this backdrop, borrow-ing more in order to expand the

business just doesn’t work anymore.While Mr. Tucker talks openly

about the despair he feels, it’s clearthat neither he nor Ms. Houston isready to give up. They recentlyplaced an ad on Jasmere—a websitethat promotes specialty retailers toconsumers—which yielded around2,000 hits for their website.

“We baked and shipped morecookies than we’ve ever made beforein one day,”an exhausted Ms.Hous-ton said afterward.

About three months ago, the duobrought on Jeff Shah, a Manhattanfinancial consultant, to help themfigure out their next steps. He’s de-

termining if it makes sense to opena retail location.

Mr. Shah isn’t alarmed by thedebt, looking at it as necessarygrowth capital. He’s more con-cerned about positioning the firm toattract an investor. He estimatesthat it would cost about $14,000 permonth to rent a “really good” retaillocation, on top of at least $200,000to open the space, after costs likegetting permits, sprucing up the siteand hiring staff are factored in.

The funding shortfall“one of the problems, really, isthat there is not a great system for

funding restaurants and cafés andfood businesses,” Mr. Shah says.

That said, he thinks the pair hasa shot at bringing on an outside in-vestor, such as a restaurant or caféthat would like to offer uniquebaked goods without having to starta new product line. Mr. Tucker andMs. Houston are also talking with aproduction company about doing areality show to raise money.

Mr.Shah agrees that the partnersneed to make a decision soon aboutthe fate of This Chick Bakes.

“If Whole Foods wanted to buy abunch of their cookies, they don’thave the capacity,” he points out.

“Either you are going to make somemoney from the business, or youmight as well fold up.”

But Mr. Shah—a culinary stu-dent by night—realizes that’s not aneasy decision to make.

“At one point, Jen looked over atme and said, ‘I just want people toknow that this is a product made bypeople who give a damn,’”he recalls.“That’s what makes them different.”

Whether giving a damn will out-weigh the pressures of paying a bigstack of credit card bills remains tobe seen.

“It’s make-or-break time,” saysMr. Tucker.�

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