Play Your Cards Right
Financing with credit cards is a risk--but it can pay off.
Consider this: Almost 60 percent of small businesses recently surveyed by the National Small Business Association have used a credit card in the past year to meet their capital needs. It's not much of a surprise when you consider that SBA loans have become scarce, and traditional lenders are holding tight to funds during this recession.
Many entrepreneurs are prepared to swap sweat equity and personal savings for a successful start. But what if all that is not quite enough
Shannon Cumberland ran out of options but still needed money to pour into her handmade botanical candles. "We all know it's very hard for a new business to get a loan," says Cumberland, who started Rosy Rings in her kitchen with financing that came from maxing out five personal credit cards. It was a risk that paid off. The company now manufactures approximately 250,000 candles per year with anticipated revenue of more than $2 million for 2009.
Roni Deutch, better known as the "Tax Lady," took a similar gamble when she started her practice in the garage of her one-bedroom condo and maxed out all her credit cards for advertising on local television. "Spending money on marketing your business is not optional. The exponential growth my law firm experienced from using my credit cards to pay for advertising made it all well worth it," she says.
With 75,000 inquiries for service per year, Deutch's card-hopping bootstrapping days are long over, while Rosy Rings' success still depends--to some extent--on plastic. "We're a seasonal business, and given the current lending environment we're still utilizing credit cards to build inventory," Cumberland says.
Play Your Card(s) Wisely
From material consumer goods to software and services, businesses of all stripes can benefit from what amounts to the 30-day, no-interest loan offered by credit cards. "Even though it provides short-term liquidity for materials, inventory, etc., it is still a loan that must be repaid," warns Peter Garuccio, spokesperson for the American Bankers Association. "That shouldn't be taken lightly."
Glenn Phillips recalls that he had very high credit lines with very low introductory offers when he started Forte Inc. With handy access to funds, Phillips failed to adjust his business expenses quickly enough when the economy slowed. "I just tapped that easy money, feeling that we'd get caught up soon with a new project or two," he says.
When he couldn't pay, those loans turned into high-interest debts Phillips had to work aggressively to pay off. For the personal credit cards, he sold personal items and greatly reduced his living expenses to make more money available. Now Phillips says he's sticking to a cash reserve and bank credit plan. "I still use a credit card, but it is for monthly business expenses and is paid off each month. No revolving credit, no long-term debt."
Pick a Card--Not Just Any Card
For those still eyeing the cards in their wallets as a source of short-term capital, Josh Lipton, president of BikeShopHub, recommends switching from a personal to a business account. The veteran user of five different cards, who estimates that during his company's busy season he'll have up to $75,000 in balances, has been primarily using an American Express Plum Card. "We have always paid our statements in full, benefiting from the cash-flow bump," Lipton says. "The incentive plans and the open line of credit are quite helpful," he adds.
Cumberland doesn't recommend a specific card or company. Her strategy is to constantly re-evaluate the interest rates and offers from various companies. Websites such as www.creditcards.com allow business owners to comparison shop from a variety of lenders online.
When the Dealer's Watching
Shopping for great rates and rewards is one thing, but applying for (and getting) a new line of credit is quite another. Most credit bureau scores used in the U.S. are produced from software developed by Fair Isaac and Co. These scores are provided to lenders by the major credit-reporting agencies.
Experts suggest you take a good look at your credit score before pressing "send" on the application to determine if you'll even qualify. You can request a copy from any one of the three reporting agencies: Experian, Equifax or Transunion. A good score is above 620 points.
Check your report thoroughly for any errors. Though results take time (some account information can remain for up to seven years), there are ways to improve your score, such as paying your bills on time, keeping balances as low as possible and focus on shopping for the best rates within a specific, brief period of time. Your score can get dinged if you are inquiring about multiple lines of credit over a few months.
The more cards you obtain, the more it may affect your rating. Andrew Meyer, founder of Capability Alignment Professionals Inc., quips, "Like heartaches in dating, credit scores getting trashed are a symptom of the process of starting a business."
Meyer's business has evolved over time, a process that necessitated his carrying over $30,000 in credit-card debt. Still, he maintains there are other factors to be aware of that can wreak havoc on a credit score. "Oftentimes, entrepreneurs don't earn a consistent salary for a period, cash in 401(k) plans or spend off savings and investments."
Know When to Hold 'Em, When to Fold 'Em
Garrucio, of the American Bankers' Association, reminds business owners, "If you have multiple cards and don't repay them, you run the risk of putting your other assets in jeopardy."
Cumberland admits that if Rosy Rings hadn't done well, she would have had to declare personal bankruptcy. She's now gotten her cash flow and credit management down to a science.
"It's common to get a special rate that spikes after six months or so," says Cumberland. "We're hyper-aware of when these cards' rates are changing and make a point to get those balances transferred or paid off. We also make a point to have all of our credit cards paid off after our peak season. I'm very uncomfortable using cards for long-term debt."
Deutch agrees. "The idea is not to take on more debt than you can reasonably pay off. Don't dig your business into a hole."
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