From the January 1996 issue of Startups

FOR ENTREPRENEURS, THE line between personal and business credit can be a fine one--if there's one at all. Since most banks balk at lending money to start-ups with no track record, entrepreneurs often turn to credit cards, home equity loans and even friends or family members to raise cash.

Whether you decide to get a loan from a bank or find more creative ways to get started, you'll want to maximize your personal credit. Here's how:

Charge ahead. When a bank doesn't come through with a loan, many small business owners pull out the plastic. According to Robin Leonard, author of Money Troubles: Legal Strategies to Cope With Your Debts (Nolo Press), more than 60 percent of people who have recently started businesses can't obtain the capital they need through loans, and 40 percent of those entrepreneurs have used credit cards to get off the ground.

The advantage of using credit cards to finance your start-up is that they are often easy to get, and the minimum required monthly payments are typically small. Best of all, they put you in control of borrowing; no one will question your plans or second-guess how you're spending your money.

But that flexibility can be a double-edged sword. If your business plan isn't sound, huge credit card debts can eventually land you in bankruptcy court. Before you resort to credit cards to finance your venture, develop a business plan and approach at least three lenders for a small business loan. If your application is turned down, ask for feedback and use it to adjust your plan. If you're still convinced you can make your venture work, then pull out the plastic.

Pay as little as possible. If you do decide to use credit cards, save money by choosing those with the lowest interest rates. The average person carries eight to ten pieces of plastic. Review your statements to determine which ones have the lowest rates and use them first.

Before you take a cash advance on one of your cards, check the interest rate and find out if there are any fees. Some banks charge much higher interest rates for cash loans than for purchases, and many charge cash advance fees as high as two percent of the amount you borrow.

Watch cash flow. If you only make the minimum monthly payment on your cards and personal loans, you'll keep your credit record clean. Don't fall into the trap of letting the bills slide for a couple of months, then making one large payment to "make up for it." Late payments will be reflected on your credit record for seven years--even if you later pay off the account in full.

If you're facing a cash crunch and aren't sure you'll be able to make your minimum payments, call your lenders before you miss a payment and propose to pay a smaller amount for a short period of time until your cash flow improves. For example, offer to pay three-quarters of the usual payment for three months, then resume your regular payments. If the lender agrees, ask for confirmation in writing that your credit report won't be affected as long as you make the agreed-upon payments.

Pay less, save money. Obviously, the faster you can pay your off your loans, the more money you'll save in interest. But for many start-ups, just making the minimum payment each month can be a challenge.

Even if you're "maxxed out" on your credit cards and can only afford to make a little more than the minimum payment, how you pay those bills can dramatically affect how much those loans cost. By adding a little extra money to your total monthly payments (just $5 a month can make a big difference), and paying the highest-rate cards first, you can slash the interest charges and wipe out that debt much sooner than if you just make minimum payments on all your loans.

For example, suppose you owe $6,000 on three credit cards and you're paying minimum monthly payments totaling $150. By paying an extra $10 a month on the card with the highest interest rate, you'll pay off all your cards nine years faster and save more than $3,000 in interest.

Check your credit report once a year or at least six weeks before you plan to apply for a loan to make sure it is complete and correct. Millions of credit reports contain incorrect or outdated information that can hold up an application, or even result in a rejection for the credit card or business loan you need.

There are three major, national credit bureaus that compile and sell credit reports: Equifax (800-685-1111), Trans Union (800-851-2674), and TRW (800-682-7654). Thousands of smaller credit bureaus sell credit reports compiled from information in the databases of those three.

Plastic Made Personal

For new businesses, initial start-up costs can be overwhelming. When your cash flow runs dry, it's often necessary to finish your shopping on credit. But caveat emptor; credit card shopping should be approached with as much discerning forethought as any other important business purchase.

Robert McKinley, president of CardTrak of America, suggests contacting prospective banks to research their different maximum credit limits. "A number of issuers, typically the more aggressive ones, limit your credit line to $10,000," notes McKinley. "While this may be adequate for small start-up businesses, it's nice to have access to additional money."

Also, research these important card features:

* Interest rate. Introductory rates, fixed rates and variable rates all refer to different interest calculations.

* Grace period. Does the card offer a grace period for payment and, if so, how long is it?

* Annual fee. Some cards have no annual fee, but charge a higher interest rate instead.

* Cash advances. The interest charged on cash advances is usually higher than on regular purchases and transferred balances.

The chart below features selected cards with low rates and low fees. For a complete listing, send $5 to CardTrak, Box 1700, Frederick, MD 21702. --Karin Moeller

Rate

Annual

Fee

Card Type
Name/

Location

Phone #
Credit Information

Low Rate Cards

First 12 months: Prime rate (fixed) After 12 months: Prime + 4.9%

$17.00
Mastercard
Oak Brook Bank, Oak Brook, IL
(800) 536-3000
$500-$25,000 $10,000 annual iincome required (household or individual)

13.90% fixed

$25.00
Mastercard/

Visa

People's Bank /Bridgeport. CT
(800) 426-1114
$500-$25,000

depending on credit status

First 6 months: 5.9% fixed

After 6 months:

13.99 %

none
Mastercard/

Visa

Fist USA Bank

Wilmington, DE

(800) 347-7887
$1,000-$5,000

$14,400 annual income required (household or individual)


Gold Cards

First 6 months: Prime rate (fixed)

After 6 months: Prime + 3.75%

$28.00

Mastercard/

Visa

PNC National Bank

Tulsa, OK

(800) 762-2273
$5,000-upward depending on credit status
First 12 months: Prime rate (fixed)

After 12 months: Prime +3.9%

$28.00

Visa
Wachovia Bank

Atlanta, Ga

(800) 241-7990
$5,000-$7,500 depending on credit status
11.65% variable (Prime + 2.9%)

$39.00

Mastercard/

Visa

First Union Bank/

Charlotte, NC

(800) 377-3404
$5,000-$10,000 depending on credit status