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	More Entrepreneurs Say 'Charge It'

	by Robert Lahm

Credit cards have become an increasingly popular substitute for traditional sources of CAPITAL, such as commercial loans from banks and venture capital. More and more new business founders are saying “charge it” to FUND their start-ups and ongoing operations.

THE PROBLEM WITH TRADITIONAL CAPITAL

Nascent entrepreneurs without an established business HISTORY or a track record of successful financial performance often complain about the difficulty in dealing with banks. It is not easy to appease bankers who want to see three or more years of past financial records, a positive cash flow, an established customer base and other historical indices of PERFORMANCE when a business is brand new.

BACKING A LOAN

The alternative for the startup entrepreneur in a formal lending process is to offer substantial COLLATERAL -- to pledge something of value, ensuring that the bank has a means to collect. Things become even more difficult for the entrepreneur when you consider that the LIQUIDATED value of some forms of collateral may be far less than their value under more favorable circumstances. How much can you get when you sell used office furniture at an auction?

STAGE RIGHT: ENTER CREDIT CARDS

The vast majority of businesses are formed by entrepreneurs who use some form of BOOTSTRAPPING as a means to mitigate their need for startup capital (or because of limited access to traditional forms of capital). These business founders have raised cash by mortgaging homes, using severance and retirement packages, negotiating payment terms, “paying Peter with Paul’s money” (e.g., by juggling internal cash flow), using personal savings, borrowing from friends and relatives, and using personal as well as business CREDIT cards.

RECENT TRENDS

According to a Small Business Administration Office of Advocacy report, 71 percent of small firms obtained credit from NON-TRADITIONAL sources, mainly owner’s loans and credit cards. Another report published in United States Banker cited industry research commissioned by MasterCard, which found that almost two thirds (64 percent) of small business owners use “plastic for business expenses.” Office of Advocacy senior economist Charles Ou was quoted as having indicated that in the category of loans for $100,000 or less (known as MICRO-BUSINESS loans), the increasing use of credit cards may account for nearly all of the growth in that category. It should also be noted that small women-owned firms, as well as those owned by minorities and Hispanic-owned firms, tend to rely on credit cards as the most often used type of credit.

PROS AND CONS

Credit cards are a competing CHOICE among others that may be available to someone who is starting a business. Abstinence is a choice as well. If one does not have the wherewithal to start a business, perhaps he or she should refrain from doing so. Analysis is divided on the issue. Within the banking industry, small business credit card lending has become an attractive new market; this was enabled by new techniques which established a connection between one’s personal credit WORTHINESS, and small business credit worthiness. On the other hand, bankruptcies have increased, businesses to continue to fail at very high rates, and the practice is risky, at best.

PRACTICE SAFE SWIPING

If you do decide to use credit cards to start your business (or as a consumer in general), you must find ways to PROTECT yourself from the risks involved. Practice “safe swiping” every time you slide that credit card of yours through a card reader and charge on your account. This is no different than safe sex, or anything else that might put you and your well-being at risk. It helps to establish certain RULES to go by.

KNOW YOUR LIMITS

Don’t be in a hurry to start a business if you do not have the RESOURCES to do so in the first place. If everyone you talk to is skittish about your idea, you really need to question its viability in the first place. Turn over every rock looking for alternatives. Finding a backer, such as a supplier who wants you to succeed, or finding a customer who commits to purchasing and advances the money up front, would represent two such alternatives. Save money in your personal piggy bank and accumulate resources. Start out with a revenue source from some activity that feeds into a longer-term vision. For example, develop a part-time business into a full-time business over a period of time. Think small and MANAGEABLE. Think of planting tiny seeds, and nurturing growth until it’s time to harvest.

PLAN FOR THE FUTURE

Ask yourself how you are going to PAY back what you borrow -- collateralize your own loan if at all possible. Be willing to sell something such as a nicer car that you own for a more modest one, for instance. Be willing to sell all of your “stuff,” to the extent that is necessary to raise funds (preferably up front, PRIOR to starting your business; if you sell when you are desperate and strapped for cash, you will be at a unique psychological disadvantage).

DO YOU NEED IT?

Consider whether or not you ABSOLUTELY must HAVE whatever you are purchasing on a credit card. If you are charging expenses such as payroll, ask yourself other questions, such as “do I need these employees?” What alternatives have you considered in lieu of paying cash for their services? Maybe you should make them partners to the business and arrange for them to invest with their own “sweat equity” contributions to the enterprise. Have you considered temporaries, interns, freelancers, outsourcing, or virtual assistants? Have you fully automated your business, for example, with Internet enabled ordering systems?

BE AGGRESSIVE

Manage your credit card DEBT with a vengeance. Pay your credit card bills on time and protect your credit in every way possible. Use an automatic payment service through your checking account provider, an online service, or the credit card companies themselves -- Don’t ever be LATE. Send two payments just to increase the odds that one will arrive by the due date. Send payments by certified mail, if need be. Do not accumulate balances if they can be avoided. Remember that just about every letter from a bank that starts by stating, “We value your business,” probably includes a change in terms; a change of terms is just about always in the bank’s best interest and not yours, with few exceptions, such as when it is the result of a legal settlement against the bank.

WATCH YOUR OWN MARGINS

Credit cards started out as a convenience, such that one did not have to carry cash; they were used as a short-term pledge against cash that one had, and would pay back at the end of a billing period (e.g., monthly). They were not designed as a LONG-TERM source of capital. Because they are unsecured, as a vehicle for financing they usually come with higher rates. By using credit cards unwisely, you are doing the exact opposite of what entrepreneurs must do: you are, in effect, buying capital at HIGH prices, and selling your good or service under circumstances that reduce your own margins. That’s not a formula for being competitive in the long or short run.

Robert Lahm is the founder of several businesses and Web sites, an entrepreneurship professor, a public speaker, and a writer. His typical topics include creativity and innovation, careers, start-ups, and small business marketing. Webmasters and other article publishers are hereby granted article reproduction permission as long as this article in its entirety, author's information, and any links remain intact. You may visit his website at EntrepreneurshipClearinghouse.com.

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