Financing your Start Up with Credit Cards

[KristineS]

We've all heard the stories about the big businesses that were started in someone's garage and kept afloat for the first few months with credit cards. I'm not sure that I would be comfortable with using credit cards as a method of financing a start-up. The thought of taking on all that debt just bothers me.

I do know that people use credit cards to finance their startups, so I just wanted to ask how many of you would do or have done that. If you have done it, what was your experience? If you would do it, why would using credit cards be a better option than some other method?

[rezzy]

I think it comes down to how much credit card debt you are taking on. If you plan on moving/ making a big purchase/ or anything that is credit based.

I personally, wouldnt like putting it on a credit card because that could lock it up in a time where you might need that card. Leaving a CC free gives you the option to use it for other business expenses.

Once your CC is tapped and you need more, where are you going to go?

[vangogh]

I actually did finance my business by taking on credit card debt. I wouldn't necessarily recommend it, but when I started I didn't have any savings. I used credit cards for pretty much everything I could. Mostly typical life expense stuff like groceries.

It's not for everyone, but years ago I had built up credit card debt out of necessity and knew once my business was bringing in revenue I'd be able to pay it off. I also have built up a good amount of credit over the years so I knew I could use the cards for years without running out of credit. At first the debt just grew. I paid the minimums, but was using the card for more each month. Then I reached a point where I didn't need to use the cards, though still couldn't pay more than the minimum so the debt held. Eventually I reached the point where I didn't need to use the cards and could pay down the debt.

It can be scary and I wouldn't recommend going this route to everyone, but I was confident in myself and my business and knew I'd be able to pay back the cards in time. Maybe having been through the situation in the past made it easier for me.

[Dan Furman]

Not to sound negative or disparaging to those that won't do this, but I think part of what makes an entrepreneur successful is that willingness to fly without a net. That includes quitting jobs, that includes using savings, that includes taking on debt.

There are millions of people out there that would "like to" start a business and/or work from home. However, they say things like "but... right now, I have x and y, and my job is good..... maybe someday". That's all well and good, but those people will never start businesses. They want it to be safe and foolproof. They don't want risk. They may fool around with something part time someday, but that's about it. Business isn't "safe". There is no good time.

I quit a good job and financed my first business on credit. I was 24 or 25. It failed, and I was left with maybe 10k in CC debt. I eventually paid it off, quit another job (or got fired... same thing) and started another business. That one didn't work either. Left with maybe 4k in CC debt. Paid it off, got fired again, used CC a little, and here I am, nine years later.

I always knew I'd succeed. Knew without any doubt. Thus, taking on debt didn't bother me.

I know I sound very black and white here, but I think that's what you need as an entrepreneur. Is one is adverse to risk, one should not work for themselves.

[vangogh]

Dan I agree with you about having that confidence. Being in business for yourself and being an entrepreneur is as much a mindset as anything else. You do have to believe in yourself and know you're going to succeed even if it's not today.

Also with risk you need to risk in order to gain a reward. Imagine you're gambling and you only bet a penny to win a penny. Sure you won't ever lose much, but you'll never win much either. Sometimes you have to take chances in order to succeed. You shouldn't take wild chances. You do want to put the odds in your favor as much as you can, but at some point you do need to have that leap of faith kind of thing.

[Spider]

I would like to know what the difference is between credit card debt and any other kind of debt. There seems to be a general acceptance that financing your business with a loan from a bank is different from using a credit card - even from the same bank!

What is the difference?

[vangogh]

Good question. I guess the difference is the bank loan probably comes with a lower interest rate than your credit card. Though your credit card is much more willing to give you a loan.

[KristineS]

Frederick, you hit on one of the things that I was thinking about, which was debt is debt. Why would I take out a loan from the bank but not use my credit cards? Isn't it the same thing really?

I'm not sure why I'm comfortable with the idea of one, but not with the idea of the other.

[vangogh]

It's the stigma of credit cards. If you get a loan from the bank it's easy to see it as something positive for your business. The bank is willing to lend you money and so must think your business is a good risk. It's validation.

With credit card debt there's no validation. We're taught that having a balance on your credit card is bad and so you see that debt as bad debt. Truth is both are debt. They have different interest rates and payment plans, but in both cases you borrow money against future revenue.

[rezzy]

I think there is big difference between CC debt and loan debt.

CC debt can linger for months even years. As long as you make the min payment, you can keep a CC balance forever. A loan is set and created in a way where you pay the loan off on a set date. Making it come to an end at a certain date and time. Which is why loans are better i my eyes, they have a predetermined end date, instead of the revolving CC end date.

[vangogh]

No reason why you only have to pay the minimum on your credit card. You can repay your credit card as soon or as late as you want. In some ways you can see the credit card as the better loan since early on you may have cash flow issues where you can't pay much beyond the minimum.

You shouldn't need to rely on someone else's predetermined timetable.

[Dan Furman]

I would like to know what the difference is between credit card debt and any other kind of debt. There seems to be a general acceptance that financing your business with a loan from a bank is different from using a credit card - even from the same bank!

What is the difference?

The big difference, in my opinion, is mental.

In the context that we are discussing this, most "garage startup" businesses aren't getting that bank loan anyway. So it remains a "safe" thing to be willing to do ("if I can get a loan, I'd start this business... oh, I didn't get the loan... oh well").

But credit cards... hey, any one of us can likely start a business with them tomorrow. That's scary. Hence, a willingness to do the "bank loan" (which probably isn't happening), and an unwillingness to do CC's.

[rezzy]

You shouldn't need to rely on someone else's predetermined timetable.

True, but for some its the predetermined timetable that will help them get out of debt.

But the money flow brings up another point I hadnt considered. My personal fight with CCs is that charging up to much can put you in pinch when you need money in a hurry. If for instance, you car stops, you cash strapped and now have no available credit.

Where should the extra money come from? Another credit card? I think that starts the slippery slope. Careful planning and useage of a CC will be helpful, but maxing out CCs is not a good idea, it also adversely affects your credit score.

[vangogh]

Bryan, I won't disagree with anything you said. I would say that if you want to be an entrepreneur you're going to need a good amount of self discipline. You shouldn't always rely on others imposing the deadline to motivate you.

I'd also say that if you do choose to use a credit card for financing you should still leave something for a rainy day. I guess some of this depends on how much credit you have before starting.

[Dan Furman]

I'd also say that if you do choose to use a credit card for financing you should still leave something for a rainy day. I guess some of this depends on how much credit you have before starting.

Agreed - I would not advocate running all of your credit to the max. But, let's say for a person who wants to start offering a service online, maybe putting web design, some copywriting, and 3 months of adwords on the card is probably not a stretch.

[phanio]

Traditional bank loans (not LOCs) are terminal things - you start with a balance and are required to pay that down monthy or so. Credit cards are LOCs - you draw - you pay - you can draw again. Loans are good for purchases that are terminal as well - you buy a car - cars last 5 years or so - you get a loan for 5 years to cover the car - thus instead of either saving for years or putting large chucks of money down - you can leverage your income (business or personal) to get what you need.

Credit cards also have other benefits - like allowing employees to use them (in today's market - you can assign a card to your employees - limit their amount of spending and even restrict where they can use it). Credit cards also help organize your spending habits as well as reduce your overall time and expanse (writing one check a month instead of many - however, you should be paying all your bills online).

I use credit cards just to delay payments (time value of money and all - even though there is no really value to money anymore). If I can't pay cash for something (business or personal) - I don't buy it. If I can pay cash - I put in on my card - wait until the end of my billing cycle - then wait another 25 days or so until the payment is due - then pay it off in full.

Further, having and using credit cards (not maxing them out) is a great way to build and hold your credit score. Thus, when the time does come that you really need your credit to work for you (loans, insurance, employment, getting new suppliers/vendors) you have no worries.

Regarding debt in general - debt can be and usually is a good thing for a growing business - IF IT IS MANAGED PROPERLY!!!!!

Any debt must be managed - all risks must be minimized!

[Spider]

Certainly there are a multitude of ways you can use a credit card that are not available with a straight forward business loan. Also, payment is fixed for one but flexible for the other.

My point was, though, that - as far as the debt is concerned - there is absolutely no difference between the two. As already remarked, debt is debt.

But there is one particular difference that can be important from a business point of view. A business loan is often - like a car loan - secured by whatever is to be purchased. A credit card is unsecured debt.

This has two consequences--
- if you default on a secured loan, the security is forfeited and (hopefully) pays off the loan. (Think of a mortgage foreclosure.)
- if you default on an unsecured debt there is nothing for the creditor to seize so the debt is a charge on the whole of your assets.


I have found, if you manage your cards well (and the banks pay attention to how well you manage your various card- and other debt), you will be offered more cards and higher limits. I have always looked upon this as the bank telling me that I am so trustworthy in their eyes that I do not have to apply for a loan and explain how the money will be spent - they already know that I will use it wisely and can have the money without having to ask for it. Sure, it's in their interests to do that but it is also in my interest, too - as long as I manage my financial affairs well.

This results in numerous occasions of 0% and very low interest promotions and generally lower interest rates. My total average credit card interest right now is 3.47% - I am sure I cannot get a straight bank loan anywhere near that right now.

[SteveC]

In my opinion there are actually two types of debt, good debt and bad debt... for example if you buy a property with a loan then this debt is generally considered good debt as propety prices go up... where as if you purchase say a car then this bad debt as the car decreases in value.

That's basically debt as I see it... and when purchasing things for your business, you need to ensure it is good debt... ie, I need to purchase this because I have an order for xxx items and this will enable me to fulfil that order and get paid.

As to credit cards, in the past I've used these extensively for the business and without them I wouldn't be in business today... however the interest rates kills you and all it takes is a couple of bad months and those credit card bills can start to scare you and in such cases you need to work to clear them, fast forward to today and we have our own business credit cards which are cleared each month... so no interest is ever paid...

[phanio]

You are certainly right - debt is debt - all depends on what you do with it. I like the comments about using it for things that appreciate. But, not everything appreciates (just look at house prices right now - down 10% to 40% across the nation).

Buying a house can be a good use of debt - very hard for the average American to have $250K in an account to buy a house. But, the average American can leverage their current cash flow (income from business or job) to purchase the money to buy the house.

Regarding secured or unsecured debt - unsecured is easier to walk away from and thus harder to get in any sigificant amount. Regardless if you walk away from a secured or unsecured loan (if the collateral covers it or not) - it reflects badly on you (your credit).

My opinion - debt is not either good or bad - debt is debt. It sgood if YOU use it for good purposes or bad if YOU use it for bad purposes.

Debt is good in some people's hands - and bad in others. The common factor here is people.

When you receive credit (take on debt) you are actaully buying money - you pay a fee (either up front and/or with the interest rate) to use that money. If you use that money properly - no problem - if you don't use that money properly - big problems. Having collateral only helps the lender feel better that you will not walk away so easily - they don't want you collateral - hard to dispose of and very costly to take, hold and sell - lenders are not in the collateral business they are in the lending business.

[Blacktalon]

I would like to know what the difference is between credit card debt and any other kind of debt. There seems to be a general acceptance that financing your business with a loan from a bank is different from using a credit card - even from the same bank!

What is the difference?
Interest, for one.

Go for a line of credit instead. The interest rates are so much lower than that of credit cards. Instead of paying close to 20&#37; (with the risk of it rising even more should you be late on a payment), you're only paying maybe < 10%.

The terms are a little more flexible as well, as I have found with the LoC I'm using at the moment.

Much better savings and you wind up saving a lot of money that way.

[Spider]

Interest, for one.
Go for a line of credit instead. The interest rates are so much lower than that of credit cards. Instead of paying close to 20% (with the risk of it rising even more should you be late on a payment), you're only paying maybe < 10%. ... That argument depends entirely on the interest rates, as you say. If your credit card interest rate is lower than a conventional loan or line of credit, then the opposite will be true. Not to mention the convenience.

Also, I suggest people not get too hung up over interest rates - they are generally a very small part of the cost of doing business. If you are going to borrow $50,000 to buy materials to make something and sell it, the interest compared to cost of labor, cost of materials, cost of overheads, storage, transport, etc. etc etc, will be a rather small, even insignificant, portion of the whole.

I would recommend one take the time normally spent on worrying about interest and spend it on negotuiating a lower price for the materials, or a more economical means of transport, etc.

Obviously one should not ignore the interest rate entirely, but the difference between a 5% pa interest and 8%pa interest isn't all that great until your borrowings are substantial.

[phanio]

I always thought - from both experience and knowledge - that most all small busiesses use credit cards in some form to finance their business.

But, I recently read a older article from Entrepreneur magazine that listed its Hot 100 companies - companies that were founded between 1999 and 2003 and that were experiencing high growth. Here is what they found regarding how these companies were financed:

From this article, these businesses were funded as follows:

Savings & Personal Funds - 79
Friends & Family - 19
Bank Loans - 14
Lines of Credit - 23
Private Investors - 16
Credit Cards - 12
Venture Capital - 3

Just surprising that only 12 of these 100 used credit cards to finance their business.

[vangogh]

You know I'm not all that surprised by 12&#37; especially during that time period. The economy was generally better at least until 2001 and many people would have had more savings and been more willing to lend the money. 12% is still pretty significant.

[Dan Furman]

I always thought - from both experience and knowledge - that most all small busiesses use credit cards in some form to finance their business.

But, I recently read a older article from Entrepreneur magazine that listed its Hot 100 companies - companies that were founded between 1999 and 2003 and that were experiencing high growth. Here is what they found regarding how these companies were financed:

From this article, these businesses were funded as follows:

Savings & Personal Funds - 79
Friends & Family - 19
Bank Loans - 14
Lines of Credit - 23
Private Investors - 16
Credit Cards - 12
Venture Capital - 3

Just surprising that only 12 of these 100 used credit cards to finance their business.

This kind of stuff is sometimes misleading. The "Entrepreneur hot 100" is not usually the guy starting a little plumbing business or a web designer going it alone. I think it's probably more the guy who cashes out stock options, or takes a buyout, has some corporate contacts, or similar. I read entrepreneur for years, and while it's a fine magazine, I always felt the things they talked about were a bit beyond my little basement office business.

But I think the basement office / garage / kitchen table type business is what a lot of us are talking about here. Entrepreneur often talks about people who had startup capital of 80k (etc)... that's a little beyond what we usually discuss here.

Something you have to remember - a company with 100 people can easily be called a "small business".

[Business Attorney]

I agree that debt is debt, and borrowing using a credit card is simply another form of debt. There is nothing inherently wrong with using credit cards to finance a business. There are often better choices, but if the entrepreneur has evaluated the choices based on relevant factors such as cost of funds, availability, flexibility in draws and repayments, transaction costs, required collateral, etc... then credit cards may be a smart choice.

Usually, a credit card would score well on everything but the cost of funds (interest rate). I have one client with good credit who got a very low "teaser rate" on a card, kept it a year until they bumped the rate up, and then got a different card. His rate was about the same as a small bank loan would have been, with much less hassle.

True, in many cases there may be better alternatives, but there certainly is nothing wrong with using a credit card when it is the best choice.

[Ad-Vice_Man]

One thing to keep in consideration is that with a credit card your interest rate can change at any time for any reason with little to no notification (bad for planning long term) where as a fixed rate term loan is very predictable and easy to plan for 3-4-5 years down the road. Even with a variable rate bank line of credit you at least know that the interest rate will travel with prime, with CC's even the calculations change all the time.

Another thing to keep in mind is that you cannot use and SBA loan to pay off debt.. Credit card or otherwise... it's not allowed. So if you could have qualified for an SBA loan to start your business but opted for CC's because they were easier... You'll be stuck with them until you pay them off.

[vangogh]

Both good points. I don't think anyone is suggesting that credit cards are the best way to finance your business or make for the best type of loan. What credit cards provide is an easy way to finance your business or get some capital. In the end you'll likely pay more in repaying your credit card than you would repaying a loan, but many new business can't get a loan.

In my case credit cards bridged the cash flow problem months. In the beginning I was making some money, but not quite enough to support myself fully. So I charged things when and where I needed to. A hundred here a few hundred there. Obviously the debt starts to add up quickly. With repayment you only need to repay the minimum. Long term that means you end up paying more overall, but it does give you time to get your business running.

Maybe not the best option, but for some it's the only option.

[phanio]

I noticed a lot of comments in this tread and throughtout this forum about the costs of financing. It can be expensive - especailly credit card debt these days. But, what a lot of busines owners don't think about is that these expensive financing vehicles do not have to be permanent. People use credit cards and other expensive loan products to get started because they have no other choice and believe in themselves and their business. But, as the business grows and becomes more creditworthy/profitable - the business can also seek to re-finance any outstanding debt with better (cheaper) loan products or manage the business to reduce or pay off the debt ASAP. Thus, these use these conventional methods becasue they have too - but work extra hard to ensure they do not harm their business.

Plus, a lot of business owners go into business seeking one single loan amount. Thus, they try to get all of that right up front from a single loan. But, it may be better to 1) create a cash budget to know when and how much you will need and 2) get creative which means using more than one lender or seeking more than one type of loan. If you need working capital, seek a working capital loan; if you need equipment, seek and equipment loan; if you need commercial property, seek a commercial property loan. But, if you are seeking funding for several purposes – seek loans for each one of those purposes – e.g. if you need $100K – part of which will be used for equipment and part for working capital – instead of trying to get the whole $100K in unsecured funds – trying seeking a loan just for the equipment and then another for the working capital. This could even save you money in the loan run as you would require less unsecured funding (which usually has higher rates and fees) – plus get better rates from the secured loans.

[KristineS]

Very good advice Phanio and very true. Just because your financing option may be limited at the beginning doesn't mean that they always will be limited.

[Spider]

The idea that credit card interest rates can change any time is not necessarily true, and is specifically not true when compared to fixed term loans.

When you start with a credit card, it has a certain interest rate. Some cards are a variable rate - X% margin over prime rate, for example - but some are fixed rate. A straightfoward fixed term loan is usually fixed rate.

If one uses a fixed rate credit card, it is true that the bank can, at any time, raise the interest rate. But you can reject it. Yes, you can. Anytime there is a change in the terms of the card, you are given the option of accepting the change (by continuing to use the card) or rejecting it - which means the card account is closed (cannot be used further) and you continue to pay the card off on the old terms. That means at the old interest rate.

This effectively turns the card into a regular fixed term loan.

[Ad-Vice_Man]

Yes but only if you keep on top of the flood of mail they send you constantly changing the terms.

I had a client who had a credit card for 10 years, always paid her bill on time and was at an interest rate of 9% or so (not bad for a CC). Last month her CC company changed her due date to a sunday. She always paid her bills with Auto Bill pay and since the bank isn't open on sunday, the payment went through on monday... well guess what now she was late and they increased her interest rate to 53%



The idea that credit card interest rates can change any time is not necessarily true, and is specifically not true when compared to fixed term loans.

When you start with a credit card, it has a certain interest rate. Some cards are a variable rate - X% margin over prime rate, for example - but some are fixed rate. A straightfoward fixed term loan is usually fixed rate.

If one uses a fixed rate credit card, it is true that the bank can, at any time, raise the interest rate. But you can reject it. Yes, you can. Anytime there is a change in the terms of the card, you are given the option of accepting the change (by continuing to use the card) or rejecting it - which means the card account is closed (cannot be used further) and you continue to pay the card off on the old terms. That means at the old interest rate.

This effectively turns the card into a regular fixed term loan.

[Spider]

Yes but only if you keep on top of the flood of mail they send you constantly changing the terms.
I had a client who had a credit card for 10 years, always paid her bill on time and was at an interest rate of 9&#37; or so (not bad for a CC). Last month her CC company changed her due date to a sunday. She always paid her bills with Auto Bill pay and since the bank isn't open on sunday, the payment went through on monday... well guess what now she was late and they increased her interest rate to 53%Has she called the company? Or has she just accepted this and played victim?

If she has paid her bill on time for 10 years, as you state, my experience of several bank card issuers is that a phone call will correct that situation. I have called and spoken with a supervisor regarding a late charge when I was truly late, but because that was unheard of for me, they removed the charge without any fuss whatsoever, and left my interest rate unchanged.

I'm sure that there are some true horror stories over credit cards, but I am convinced they only happen to people who do not manage their finances properly. If one pays regularly, pays more than minimum and pays on time every time, these things do not happen - or, if they do, they are mechanical and not human-created problems and easily solved with a polite call to customer service.

Furthermore, 53% doesn't sound like an APR, which this story seems to suggest. If the balance outstanding was $66 and she was charged $35 late fee, that month's finance charges would show as 53% (35/66=53%) while the APR remained unchanged at 9%.

[Ad-Vice_Man]

The new legislation that congress has put through to reign in credit card abuse hasn't taken effect yet. so the CC companies are in the process of setting the bar high before hand.

Right now there is NO cap on Credit Card Interest Rates. 53% is the APR.

[Spider]

That doesn't make sense to me, AV. It doesn't make sense from a legislative point of view, nor from a practical point of view.

It wouldn't make any difference how high credit card interest rates are to any pending legislation. And the way you described the cardholder (10-year customer, carried a balance, always paid on time, auto-pay) seems to make her the perfect customer, so they would have every incentive to retain her as a customer.

This is either a mechanical fault in the system which could easily be solved with a call to customer service, or there is more to this story than is being told.

[Ad-Vice_Man]

The legislation stipulates that a card company has to have a good reason to up the interest rate. So all the card companies are upping interest rates across the board now before the legislation goes into effect because later it will be harder/impossible to do so.

[Spider]

I don't know if ALL the card companies (banks, I presume you mean) are increasing their rates, but I do know they aren't increasing them on ALL their customers - because none of mine have gone up recently.

I keep a small balance and pay interest, just to show that I am prepared to pay for the use of my cards - roll the the balance around from card to card occasionally, so they know I can, and do, pay it off when I feel like it - Like if they raise their rates.

I believe the banks are in competition with one another and any bank that raises their rates disproportionally will soon find their customers using other, cheaper banks for their credit card purchases. It's easy enough to arrange balance transfers, and in many instances it is free to do it *and* get an introductory zero% interest rate, too.

[dwiads]

I also wondering why people can start business with only credit card. Well what I can think could be as freelancer. or I creating my very own products with my hands.
however for people with only idea, I believe need more money which impossible using credit card.

[theDIfellas]

Not to sound negative or disparaging to those that won't do this, but I think part of what makes an entrepreneur successful is that willingness to fly without a net. That includes quitting jobs, that includes using savings, that includes taking on debt.

There are millions of people out there that would "like to" start a business and/or work from home. However, they say things like "but... right now, I have x and y, and my job is good..... maybe someday". That's all well and good, but those people will never start businesses. They want it to be safe and foolproof. They don't want risk. They may fool around with something part time someday, but that's about it. Business isn't "safe". There is no good time.

I quit a good job and financed my first business on credit. I was 24 or 25. It failed, and I was left with maybe 10k in CC debt. I eventually paid it off, quit another job (or got fired... same thing) and started another business. That one didn't work either. Left with maybe 4k in CC debt. Paid it off, got fired again, used CC a little, and here I am, nine years later.

I always knew I'd succeed. Knew without any doubt. Thus, taking on debt didn't bother me.

I know I sound very black and white here, but I think that's what you need as an entrepreneur. Is one is adverse to risk, one should not work for themselves.

That's really encouraging, what you've shown--not giving up.

I believe one of the biggest reasons I'll (and we as a company) will succeed is because we've failed before, made mistake in life and/or business and improving our decision making for the future.

[vangogh]

A very big part of being successful in business is not giving up. It's going to take time to get a business going and if you have to stick it out through that time. Like you said, you learn from your mistakes and do better the next time. Hang in there long enough and you can eliminate so many mistakes that most don't every get past.

[janiels]

I haven't experienced using credit cards to start my business but there are lots of stories that tells they succeeded in this process, you just have to be disciplined in holding the money for you will surely need to budget all things that is required in your business.