Credit Card Financing Is All The Rage.
By Janean Chun
Small businesses are charging into the future. According to a recent survey by Arthur Andersen's Enterprise Group and National Small Business United (NSBU), credit card financing among businesses with fewer than 20 employees has nearly doubled during the past five years, from 17.3 percent in 1993 to 33.5 percent in 1997. Meanwhile, use of traditional financing sources declined, as reliance on commercial bank loans and private loans decreased 24 percent and 32 percent, respectively.
The popularity of credit cards as a form of alternative financing has escalated as more credit card companies target small-business owners. "What's changed is the availability of credit card financing, and the marketing campaigns the credit card companies are using," says Nancy Pechloff, director of Arthur Andersen's Enterprise Group.
More important, entrepreneurs are biting. "It's instant credit--and you don't have to ask anyone's permission," says Pechloff.
But with that lack of accountability comes a danger--credit card debt. "If they're using credit cards in lieu of having a relationship with a banker," says Pechloff, "there's no one providing any oversight, so this company could be overextended."
Fortunately, most entrepreneurs appear to be acting not out of recklessness or desperation but out of sheer strategy. Seventy-six percent of the survey respondents were able to obtain adequate financing for their businesses during the past year. And 60 percent of companies using credit cards pay off their bills every month; only 24 percent carry balances. "Small-business owners are getting 30 days of free financing from the credit card companies, then paying off their bills," says Pechloff. "It's a creative way to create cash flow in financing for short-term borrowing needs without paying the interest costs of bank loans."