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House of Plastic

Thinking of charging your startup costs? Here are the pros and cons of using credit cards to finance your biz.

Banks are still courting small businesses, but thanks to a struggling economy and increased defaults, lending standards remain tough, particularly for unsecured microloans. There is one source of capital, however, that is still plentiful even in tough times: good, old-fashioned plastic. And entrepreneurs have been banking on it, according to the SBA Office of Advocacy's annual microloan study. While traditional commercial lending remained flat for 2001, the total number of microloans, or loans of less than $100,000, climbed 10 percent among banks surveyed--and mostly thanks to credit cards.

Banks typically don't show off their numbers for microlending by credit cards, so the study's authors relied on a bit of subtraction to get answers. They first compared the total number of 2001 microloans to 2000 figures and arrived at the 10 percent jump, and then removed credit card banks from the results. They noted that the increase in microlending dropped to less than half a percent. That points to significant growth in credit card-based lending, says Charles Ou, senior economist at the SBA's Office of Advocacy. He posits that over the past few years, banks have seriously stepped up their small-business campaigns and made cards available to a larger pool of businesses, thanks in part to better credit-scoring methods. Today, a business owner's good standing in the consumer card department can win him or her easy approval on a corporate card application.

Even in cases where business owners don't have the best credit history, credit or charge cards are easier to get than ordinary commercial loans. And in today's market, the latter may simply not be available. "The credit card is a guaranteed line of credit," says Lewis Mandell, professor of finance at the University of Buffalo in New York. "And it may be that banks are really just pulling back from offering unsecured loans, which may have forced small businesses into credit cards."

While the notion of financing a business by credit card might sound imprudent, for some, it's the ideal solution to a capital crunch. Kathrine Gregory, founder and director of New York City-based Mi Kitchen Es Su Kitchen, a 4-year-old business that offers kitchen facilities on a time-share basis to food manufacturers and caterers, has a wallet full of cards. "I put 100 percent of my life on credit cards," says Gregory. "It's a 30-day float on your money. It's a guaranteed loan--at very high rates, but it's a loan." The 30 days come in handy when payment from a client might be overdue, or when the business needs unexpected supplies.

Of course, more than a few business owners have gotten into trouble that way. And while Ou says small-business owners are not carrying large balances on their cards from month to month, according to banks' call report data, the temptation is there. "Most entrepreneurs are responsible until they're up against the wall," says Lewis Mandell, professor of finance at the University at Buffalo. "I think to save a business, most will do whatever they can that's legal."

But assuming an "intelligent, discriminate use of cards," says Gregory, putting expenses on plastic can actually save money. She points to American Express' savings program, in which business owners can earn discounts with FedEx, Hertz and Staples, among others. "In business, the object is to maximize your money every single day," says Gregory. "When you work for yourself, you're always looking to save the pennies."

According to a fall 2002 study from American Express' OPEN: Small Business Network, entrepreneurs are using their cards for increasingly diverse expenses, beyond the traditional travel and entertainment. For example, 38 percent reported using credit cards to purchase goods from wholesalers, a relatively new category for plastic, says Kerry Hatch, executive vice president and general manager of OPEN. But she can imagine any number of additional categories approaching critical mass. "One area they don't use it for now is rent," says Hatch. But could it happen? "Ten years ago we didn't think goods for resale would be something that would go on plastic--so absolutely."


C.J. Prince is executive editor of CEO Magazine.

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