05/ 02/ 2006
by Lena Basha
Credit cards can be a quick-but risky-way to secure funding for your business
The Small Business Administration turned the women down for a loan because-with their husbands-they had too many assets. Conventional bank loans weren't a viable option either. Instead, this pair took advantage of their good credit scores-and low interest rates-borrowing from credit cards the extra $10,000 they needed to start their Gambrills, Md.-based business, Pippen Hill Designs, which creates and sells pillows for infants and children.
"The credit card loan was faster, the interest rate was lower and the time to pay it back was not unreasonable," Gradie Chinn says. "If you're looking for a small amount of money, using a credit card is one option."
But experts like Fred Wainwright, executive director of the Center for Private Equity and Entrepreneurship at Dartmouth University's Tuck School of Business, warn small-business owners about the dangers of using credit cards as funding sources.
"Business owners should not think about credit cards as plan A," he says. "It's an extremely risky way to launch a business. If you're going to take out a credit card loan, you have to execute it perfectly. There is no room for mistakes."
Wainwright cautions that credit card loans, unlike conventional business loans, are based on personal credit, so if the business doesn't work out, the debt rests on the shoulders of the individual, not the business. And new bankruptcy laws make it harder for individuals to erase their debts.
The bottom line, Wainwright says: If you're going to use plastic, have a strict plan for exactly how you will pay back the debt.
Play It Safe
If you're set on using a credit card to fund your small business, follow these tips to avoid the traps that could put you under serious financial stress:
1. Have a plan. Before considering credit cards as a funding option, make sure you have a detailed business plan, including how you will generate enough revenue and cash flow to pay back the debt, Wainwright says.
2. Shop around. Wainwright suggests comparing the fine print on a variety of cards before deciding on one. "The teaser offers can get very confusing," he says. Web sites like www.federalreserve.gov and www.cardratings.com can help you make sense of introductory interest rates, late fees and future interest rates.
3. Be disciplined. Because interest rates and fees quickly can get out of hand if you miss a payment, make paying off your balance a top priority.
$522 Billion: The amount of outstanding small-business loans owed to commercial banks.
Source: Small Business Administration
