NFIB

Finance With Plastic?
04/ 11/ 2002

by Shannon Scully

The offers come in the mail daily, promising low introductory interest rates and sky-high credit limits. To cash-starved small business owners, the temptation can be great to take these credit card offers and run -- and more and more are beginning to try it. Almost half of all small business owners with 10 or less employees used credit cards to finance their business in 1998, up from 40 percent five years earlier, according to a 1999 report by the Small Business Administration (SBA). But is it a good idea to finance your business with plastic?

Yes:

Charlene Connell meticulously planned the launch of Vital Resources, a technology consulting firm based in Cleveland, Ohio. Thinking a bank wouldn't be likely to loan money to a brand-new company whose only commodity was people, Connell began applying for credit cards about six months before she left her job at a national consulting company to open the doors of her own business.

"I always had very good personal credit, so I decided to take advantage of it. Especially since I knew it would be almost impossible to find start-up capital," she said.

Connell applied for and received 10 personal credit cards, all with competitive interest rates, she says. After buying a computer and leasing a small corner of an existing office, she opened Vital Resources in October 1990.

"The credit cards basically functioned as a line of credit," she explains. Adamant about controlling her debt, Connell says she only used the credit cards for payroll purposes. "I paid my employees on Fridays. On the Saturday after paychecks were mailed, I'd drive down to my office to check the mail. If I hadn't received checks from clients, then I'd zoom to the nearest bank and take a cash advance from one of my credit cards."

After about a year of this balancing act, Connell finally grew her business enough to qualify for a line of credit from a bank. Her careful control of the credit cards proved to banks that she was able to manage debt, she says. Though she admits that putting her personal credit on the line was a risk, she was always confident in her ability to manage her finances. Now, almost 11 years after Connell took a gamble, Vital Resources is pushing $4 million in annual sales.

"You need to be very disciplined about it. If you're not good at managing personal debt, I wouldn't suggest financing your business the way I did," Connell says.

No:

"Avoid using credit cards at all costs," says Rudy Cavazos of Money Management International, http://www.moneymanagement.org , a nonprofit credit counseling group in Houston, Texas. "If you're not careful, the low introductory rates sneak up on you, and you're left with large balances and extremely high interest rates," he says.

The reason more and more small business owners are turning to credit cards for funding, says Cavazos, is because they're easy to come by and the credit limits are high. Those who are just starting out also have a tendency to mix their personal and business finances, which makes it even more difficult to qualify for a loan later, he says.

Instead of credit cards, Cavazos recommends saving money by living far below your means for a while, which will help when applying for a loan. "Putting a plan into effect to accumulate actual cash is not as difficult as it seems. The more money you have, the easier it is for financial institutions to lend you money," says Cavazos.

But if saving money is not feasible for those in the early stages of business, then Cavazos advises developing a thorough, sound and functional business plan before approaching a bank for a loan or a line of credit.

"If you go to a bank with a well-written business plan, then they view you as a better candidate. They are likely to be more lenient and go out on a limb for you," he says. "Too many people go to banks asking for money without any sort of plan for their business."

If you have gotten yourself or your business into major credit card debt, then Cavazos suggests joining a debt management program so your credit rating won't suffer.

"If you are in debt, you should focus on paying off the cards with the highest interest first. Often, debt management programs can help reduce your interest rates to single digits and get you back on track."

The Bottom Line:

Since credit card debt can easily spiral out of control, explore other funding avenues before deciding to use plastic. If credit cards are your only option, then formulate a plan to manage the debt and stick to it. Connell says her decision to never purchase goods with her cards worked well for her. Be careful not to fall prey to overspending --it all has to be paid back one day, with interest.

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This article originally appeared in the September/October 2001 issue of MyBusiness Magazine, NFIB's member magazine.

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