Credit Cards or No Credit Cards

[KristineS]

There are two pieces of advice I seem to see a lot when reading about starting a small business. One is to have savings that equal about a year to two years of income before you start your own business. The other is that savings may not be necessary, you can just use credit cards to carry you through until you start making money.

I'm curious, those of you who have businesses you own, how did you start? Did you have savings? Did you get a loan? Did you live on credit cards? From where did your initial funding come?

[Harold Mansfield]

...
I'm curious, those of you who have businesses you own, how did you start? Did you have savings? Did you get a loan? Did you live on credit cards? From where did your initial funding come?

This will be long, but the accumulation of experiences and events is relevant. First of all, for me credit cards were not an option.

Around 2004 I was at the end of my career as a bartender and limo driver. I hated it, and knew it was time to start something on my own. I had no idea how, what, and no money. I had thought about it my entire life, but now it was on my mind every day. I was obsessed with new tech and had subscriptions to every tech magazine, and was glued to ZDTV. Whenever I could go to COMDEX, CES or any other tech related convention, I did.

At the time I was renting a 5 bdrm house, and decided that I needed to downsize and prepare for being broke. So in 2006 I moved and shared a townhouse with a good friend which cut my bills into 1/3. Around that same time I was out of the bar biz and couldn't even stomach going back to driving a Limo again, so I was passing time working at a Time Share/Resort company, which I also hated but thankfully is where I learned how to talk and sell over the phone...which really came in handy later.

I tried to dabble in domain reselling, and through that I met a guy with a portfolio of about 10k domains that he'd built since day one of the first registration. He was also a huge name in SEO at the time ( Remember this was kind of the early days of Google becoming a powerhouse). So in my spare time I worked as a domain broker for him, hustling keyword domains over the phone and on sales forums.

He also had a mortgage lead site, so I was also hitting the broker sites selling packages of leads. Back then fresh mortgage leads were going for $75 per, $50 if they were stepped on ( called once), and you could even get $35 per if they were dead leads. It was a feeding frenzy and we were selling them in bulk ( of course now I know why).

Along the way he taught me a lot about the business, the web, SEO and business in general. Specifically doing business online.

Around the same time I started playing with WordPress and put up a music blog in my free time (which actually became pretty well know over the years), and tossed up some Google adsense and some affiliate links. Back then WordPress was kind of new so I spent most of my time troubleshooting issues. Sometimes spending entire weekends trying to fix one problem. The good old days. No "one click" install. No one had C-Panel. Plug ins weren't vetted, and hosts didn't know much about it. It was raw. Just you, a few forums, and notepad. Forums were a huge help to me.

2007 is when we started seeing signs that all hell was about to break loose. The resort company was laying off (I'd never seen anyone in Vegas lay off since I got here in 1994), and all of my old co-workers from the bar biz who had gone on to write mortgages started expressing concerns about the crap paper that the housing market was written on and telling me how it all worked. At the time Vegas was the hottest housing market for 10 years running, and the fastest growing city for 15 years. At the height of it all it was estimated that there were 35k real estate agents in this town. For a while there was a 30 day wait for ANY listing, anywhere. The demand was huge because everyone was flipping before the adjustable rates kicked in and making a mint.

Because of that, I had also managed to pick up a few side jobs building websites for old friends who were now Real Estate Agents and Mortgage brokers.

By 2008 the collapse was happening and my company started laying off in massive chunks. My department went from about 1200 people to 200 over the course of maybe 4 months.

After the election one of the things President Obama announced was Unemployment extensions. The third extension (which he horse traded for extending the Bush tax cuts) was up to 99 weeks. Right after that our comapny announced that they were shutting down my department in 2 months. That was the perfect storm for me.

The day of the announcement I went to human resources before lunch and asked would they contest my UE claim if I just didn't come back. The last guy in there said "No", so I never went back.

I applied for UE immediately, got it ( whew!), and used that time to brush up on my skills as a web designer, work my music blog, and learn WordPress like the back of my hand...working Freelance boards to get some cheap, crap work along the way.

Mid 2007, 2008, and 2009 was hard out there. No one was hiring, businesses were closing, foreclosures were in the millions, construction had stopped cold, the market crashed, banks were failing, no one could get credit, and we were losing jobs nationwide by 100k A MONTH. It was a wasteland. Best place to be was inside keeping your head down, expenses low, and learning a new skill.

By the time UE ran out I was up and running, open for business. and I never looked back. It was a HUGE struggle, but by 2010 I was making enough to live alone again and just kept sticking and moving, adjusting to changes, and just trying to get ahead.

That's how I got started. I literally had nothing. One thing just led to another and it just seemed like the most logical choice. I always tell people that Unemployment Insurance saved my life. First time I ever used it, but I recognized that the current conditions was a one time opportunity to help pull myself up. It's also why I'm hard on people that went through it and didn't use the time to learn something new.

When I'm 80 and insanely wealthy and tell this story it will probably start something like "I built this empire from nothing out of the ashes of the great recession ..." (while shaking my fist in the air) :)

[turboguy]

That was an interesting story Harold. Thanks for sharing it.

When I started my first business credit cards were not an option. There were no credit cards other than Diners Club. I can recall having a discussion with one of my customers about 2 years after I started my business about credit cards and if they would ever catch on. They had just come out and were used very little.

I was 21 years old. I had a little savings from delivering newspapers as a teen. I worked in my business during the day and took a part time job driving taxi in the evenings and weekends so I could afford groceries. I got married shortly after starting the business and we struggled a lot. Later she worked which helped and after a couple of years the business started to make a profit. I was actually in a partnership with my Dad and about the time things really got good he died and I continued on alone.

The first business was a marketing business (mfg rep). I always wanted to try my hand at manufacturing and right after I started hit some financial hardships that made starting the manufacturing business really tough. One part of that was getting divorced, then buying another business that the former owner destroyed on his way out to maximize his gain and I had been importing stuff from England and was warehousing at the largest Ford Tractor Dealer in the North East. He committed suicide and his bank got my equipment and I was stuck with the loan to finance it along with some debt to the guy whose business I bought out.

My credit would not have let me borrow money on a credit card after all that so I just worked 23 1/2 hours a day and ate whatever was on sale that week. If it was Mac and Cheese I at that all week. After a couple of years that business took off. Things got a little rough after the housing crash but for the most part this business has been one I enjoyed and one I have done well with.

[Harold Mansfield]

Wow! Also an interesting story. Man, you really went through some stuff.

[turboguy]

Wow! Also an interesting story. Man, you really went through some stuff.

Thanks Harold, Yes, I did. That was the thumbnail version. The full version would probably be more interesting.

[KristineS]

Both of you guys have interesting stories and insights. I'm mostly curious because I think I'm going to be making a leap of my own pretty soon, and one of my big concerns is how to keep going during the lean times. Your stories give me some possible avenues to pursue.

[Fulcrum]

I see the savings and CC debate as 2 sides of the same coin. Savings can show prudence and can help mitigate some early risk yet credit cards, and debt in general, can help propel a start up when used prudently. Debt can also be the weight that kills a start up before sales take off.

My grandfather had a business. All his kids (11 of them) had the same type of business. My older brother was the first of the 3rd generation to start in that business. I consider myself the black sheep (or is it Tommy Boy?) since I didn't go into the food industry.

As for my starting out, I had toyed with the idea of had a starting a business for as long as I can remember. During high school, if I had ways to make a quick buck, I would do it (I did not sell illicit drugs). College had me working 40-50 hours a week on top of a nasty 30-35 hour class load. In the end, I dropped out of college due to behind the scenes politicking and I was sick of formal schooling (15 years later and I still get headaches if I think about going back).

After some time (9ish months) working in construction and farm service I took a job making high precision tooling (end mills, drills, custom mill and lathe tools, etc). Worked there for just over 8 years). During this time I had bought a townhouse. Near the end of my time there, I had a "falling out" with the boss and a few of his kids. Personality clashes, broken promises, changing of work orders after the fact, all led to me saying on May 27, 2011: "June 10 will be my last day". I had no job lined up and still had $145K in debt. Didn't care. Had the best nights sleep I had had in years. Personally, I believe that I was on the edge of a nervous breakdown.

Called my parents, told them what I had done. When asked what I was going to do, all I could say was I hadn't decided. Worst case scenario had me going back into construction (strong back, strong arms, heat didn't bother me). My dad then says that one of his guys (interestingly enough this guy took my spot when I started in construction in 2002) was leaving to drive 18 wheelers. I went back to work for family.

In mid February of 2012, over the course of about 36 hours on a weekend, I received 3 interesting phone calls. The first call was my former boss at the tooling place wanting me to come back (their top guy was leaving as I found out later). The second call was from a similar business that wanted to hire me (2 years later he sold this business to the top guy I referred to in call 1). The third call was someone I barely knew wanting me to join them in a sketchy real estate deal.

I thought to myself after the 3rd call - "well, it seems like everyone wants you why not buy a business for yourself?" 30 minutes later, I called a shop where I knew the owner was probably setting himself up to retire, asked if he still had the business and if he might be interested in selling it. He answered "yes" to both questions so I asked if I could come out and take a look at it the following Tuesday evening. Took a 5 minute look (conceptually a very simple business) and asked "how much?". He gave me a price. I said "Okay, if you'll take 40% down and finance the rest over 5 years". I gave him a cheque for $500 as a deposit, we shook hands, and drew up a very simple bill of sale and liability waiver. On August 20, 2012 I handed over the remainder of the down payment, transferred the assets to my name, and started on my own. I was all in with about $300 (not even 1 months rent) in my bank account. Hmm, looking back as I write this, I start to think that a few mistakes and leaps of faith were taken here by both of us. I paid off this note around this time last year.

I spent the next 6 months living off of breakeven cash flow (profitable work just lots of inventory building and machine repair) using my personal line of credit. In December 2012, I had my takes reassessed from the year earlier and got hit with a surprise $3,000 tax bill (last time I will ever use a brand name, chain store type of tax person).

Fast forward to now, and I still use my credit facilities extensively. In the last 4 years, I've spent around $200,000 on my credit card (points card only as cash back cards weren't offered to me). I use my credit line for bridge financing to shift debt off the card (I'd rather pay 7% interest than 22%) and so I can move quick if a deal shows up. Banks still won't give me any kind of business credit aside from a 24% interest card - not even overdraft for my business account even though my credit score was around 780 last time I checked (Dec of last year). Aside from rolling debt on the credit line and cards, I don't think I have more than $1,000 payable outstanding at any one time.

[Harold Mansfield]

Both of you guys have interesting stories and insights. I'm mostly curious because I think I'm going to be making a leap of my own pretty soon, and one of my big concerns is how to keep going during the lean times. Your stories give me some possible avenues to pursue.
It's rough. Stressful. For a while it was lurching from one lean time to the next. Barely paying things at the last minute, always late on rent (had a great landlord at the time), $20 to last the weekend (many times less), short term loans from family..things like that. As long as I could keep the electricity, internet and phone on and my hosting bill paid, I was in business and anything was possible on any given day.

I can't tell you know many times I got lucky with last minute (deadline Friday) calls that I ended up closing that day to make rent or pay a bill or eat. I got really good at closing on the first call and qualifying people that I shouldn't spend time on. Not sounding desperate and remembering my training from the job that I "hated".

I spent a long time trying to solve one problem, "How do I only attract people who need exactly what I have to offer, and are ready to make a decision today so that when the phone rings, I just need to close them". I made it a mission to make money every time the phone rang.

And that comes from always being behind, stressed out, and needing that lucky call too many times for comfort. I had to improve the marketing and sales process.

If you can make it through the crap and stress and suck it up eating Top Ramen and hot dogs when you have to, flirt with disconnect notices and so on....and come out a better sales person or better marketer, you'll make it.

IMO, if it's too easy or you have a safety net..you will fold like a cheap suite when things get stressful and give up. I didn't have a plan "B" so I didn't really have a choice but to make it work.

I also got very good at grocery shopping on a budget as well as fixing my own computers.

[Fulcrum]

A few other things I would like to mention:

Look for, and use, every write off and advantage you can find. You don't do this because you deserve this (popular media assumptions aside), but because odds are you will need them.

Home office deduction? Take it.
Vehicle allowance? Grab a log book and take it.
Discounts for COD vendor payments? Pay early and take the 1-3%.
Got a cash back credit card that you know you can pay off every month? Use it and pay it off. Use the cash back to either fund other purchases or CC payments.

Record everything. Need to buy a pen for $1? Get a receipt and record it and the mileage to the store to buy it. Its amazing how quickly these little expenses add up.

Also know that we're all rooting for you. Most of us are still on the path and know how bi-polar it can be. One week sales are off the charts and money is rolling in while the next week your phone rings off the hook, you can't seem to buy a sale, and your money seems to disappear long before it comes in.

[tallen]

So the businesses I am involved with are all side businesses (for now), funded from savings and the income they are generating*. At some point we will make the leap, the current hold-up being that my son is going to college and the financial aid office won't look kindly on me voluntarily giving up my day job.

*Ok, one of the businesses we don't own, but are managing, and the owner did make a lot of investment in the biz when we took over (trying to catch up on deferred maintenance, etc...), funded by a line of credit secured by some of his other assets, but after those initial investments, we've been able to fund further investment in the business out of it's current income.

BTW, I agree with Fulcrum on savings and debt being two sides of the same coin, and also on understanding the rules of the game (so to speak) so that you can take advantage of them to the fullest.

[turboguy]

I think one of the factors to consider is that if you have good credit you can get all kinds of 18 month zero interest rate cash advances. As long as you are confident you can be successful going that route is a good choice. If however what you put on the credit card is going to cost you 18-14% a year I would not recommend that option. It is too easy to just dig yourself a deep hole that will be hard to climb out of.

I think Fulcrum had some good advice about discounts and cash back cards as well as taking all deductions and watching expenses. It all adds up and can make a really big difference over time.

[nealrm]

I'm not a big fan of credit cards, they tend to cause more harm than good. In a majority of cases it is excessive debt more than lack of income that causes a business to fail. Cutting up our credit cards was the best thing we have ever done both as a business and as a family. That was in spite of the fact we paid them off every month. A vaste majority of people will send more useing cc than debit cards, and more using debit cards than if they pay with cash.

[Harold Mansfield]

I'm not a big fan of credit cards, they tend to cause more harm than good. In a majority of cases it is excessive debt more than lack of income that causes a business to fail. Cutting up our credit cards was the best thing we have ever done both as a business and as a family. That was in spite of the fact we paid them off every month. A vaste majority of people will send more useing cc than debit cards, and more using debit cards than if they pay with cash.


I'm with you on that. I understand credit card use by business people who are on expense accounts, are being reimbursed by the company, or are tracking travel and other business related expenses. But I'm totally against spending more money than you have by paying interest and monthly payments on the stuff that you really couldn't afford in the first place.

I understand emergencies, and who knows...had I had any cards with a large enough line of credit maybe I would have purchased my first office computer and supplies with it. But then what? I wasn't making enough to keep up with the payments that first year...so it would have just created another problem.

The truth is, you can start most home based businesses for a few grand or even less. If you aren't creative or motivated enough to come up with a few grand just to get off of the ground, then what's going to happen when credit cards are no longer an option?

Sometimes you can't start with everything. You start however you can, doing whatever you can to bring in money so that you can finance the next thing or the main thing. I started with an old Compaq Presario with 4G RAM that was slow as molasses until I could afford better.

Too many people have no concept of working their way up. Doing what you have to do to get where you want to be. I don't know anyone who started with all of the equipment that they would have liked to have. Get the most important things first. Bare bones if need be. Get the stuff you WANT later when you can actually afford it.

This is all just my opinion based on my own experiences. And I'm conscious of that fact that I hate it when people tell me "I did it like this, so you should be able to do it too".

I just don't think maxing out your credit cards in the spirit of that "do whatever you can to get started" attitude is the best advice unless you have a real plan after that like already have clients and sales in the bag that will pay off that debt. Especially if it's your first rodeo.

Mitigating debt is kind of a skill. You need a plan that's better than "I hope I make enough to pay this off".

[Fulcrum]

I don't know if that could've been said any better Harold.

How often are we told and taught to just "go for it. Live in the moment and don't concern yourself with the future. If you do good work the money will just come rolling in"? If only they knew the real truth.

[KristineS]

This is all such good information, and it's giving me a lot to think about. I'm not ready to jump yet, and I'm working on building up a client list now so when I do jump, I'll at least have a few eggs in different baskets. I also need to think about health insurance, because I have health issues that need to be managed with medication, so that's an issue. I understand it will be ups and downs as far as cash flow, and I think that's one of my main hurdles right now. I've been seriously, seriously broke in my past, like no food in the house and no money to buy more broke and, while I got through it, that definitely wasn't a fun time in my life. So, I guess I need to decide if I can deal with the possibility of that happening again.

[Bobjob]

These are the stories I enjoy most. I don't personally know the struggle. My dad worked as a purchasing agent for large company. My parents used his profit sharing money he'd accumulated over the years to float themselves.

[Harold Mansfield]

These are the stories I enjoy most.
Same here. The stuff that no one talks about. Beyond the romanticized version that you see on TV and in commercials, and articles about successful start ups that go from just a good idea to billionaire without ever tackling the stuff in between.

I've always been a fan of the "inside scoop" stories. It's better than fiction. I've read more articles about why one company or another failed than I can count. It's where you really learn a lot, if nothing else but what NOT to do.

[Bobjob]

Same here. The stuff that no one talks about. Beyond the romanticized version that you see on TV and in commercials, and articles about successful start ups that go from just a good idea to billionaire without ever tackling the stuff in between.

I've always been a fan of the "inside scoop" stories. It's better than fiction. I've read more articles about why one company or another failed than I can count. It's where you really learn a lot, if nothing else but what NOT to do.

Yes. I know it sounds bad but also like big heist stories. Back when Tru tv was Court tv they had a show, I believe it was called Criminal Minds, where they told the story of big heists. Wish I owned those episodes.

I saw a video on inc.com about a girl who had her own business in high school. Then after college she had a startup and investors gave her a couple million. Her startup was failing. But she talked about having a hot tub in her office. I believe this wastefulness is normal for tech business but it wouldn't fly down here.

[Harold Mansfield]

Yes. I know it sounds bad but also like big heist stories. Back when Tru tv was Court tv they had a show, I believe it was called Criminal Minds, where they told the story of big heists. Wish I owned those episodes.

I'm a big fan of the show "American Greed" on CNBC. I'm constantly amazed at the stuff people still fall for, and how blatant some of the criminals are at stealing from them. Most of the schemes aren't complicated at all. Just presenting something to people who want to hear it, taking their money, and then just spending it.


I saw a video on inc.com about a girl who had her own business in high school. Then after college she had a startup and investors gave her a couple million. Her startup was failing. But she talked about having a hot tub in her office. I believe this wastefulness is normal for tech business but it wouldn't fly down here.

I wouldn't say it's specific to the tech industry, but more specific to a certain age and maturity of the person doing it. I know I'm generalizing, but young people seem to want it all now and many actually think they deserve it for some reason. I remember being young and wanting it, but don't remember feeling a sense of entitlement about it.

[RobertL]

Keep your expenses low and keep working part time until your business takes off.

[Bobjob]

I found my show it last night. The show's name is Masterminds not Criminal Minds.

[HiveFive]

This is an older thread but I really appreciated reading it. I was listening to a podcast this morning put on by SCORE talking about borrowing. They really mad it sound like it was such a good idea to do it. I have a good credit line for business, sometimes it's really scary how much I could borrow if I wanted to. My wife and business partner wouldn't borrow a dime if she had to, her upbringing... I let her control our spending. We are currently starting up a new business and I see a good probable return on our business plan. I want to jump in and buy 10k worth of equipment to have on hand when we open the doors. My wife is one who says work the job until you absolutely need it. I know she is right and after reading a few of the stories here I KNOW she is right.
I think the long road is the safest. I'll keep the credit line clear for fast turn inventory on our retail side, if I have to pay 10 or 12% interest on it I'd rather make 40% ROI.
Again, thanks everyone for the input!!!!