Increasing numbers of entrepreneurs have turned to credit cards to finance their business ventures in recent years. Often, these credit cards were originally secured for personal use, but credit card issuers are targeting business owners for corporate cards as well. "Credit cards are one of the most overlooked resources for obtaining start-up capital," said the Entrepreneur Magazine Guide to Raising Money. "The downside is that most charge perilously high interest rates; but it is a way to get several thousand dollars quickly without the hassle of dealing with paperwork."
Studies indicate that use of credit cards for small business purposes has surged dramatically in recent years. In fact, a 1997 Survey of Small and Mid-Sized Companies indicated that 34percent of its respondents used credit-card financing to start or expand their businesses. The majority of these cards are for personal accounts, though credit card companies are making an effort to convert these holders to corporate accounts in many cases. According to Inc., "credit-card issuers are no longer turning a blind eye to the use of personal cards for business purchases. Instead, they're aggressively pursuing small business owners in the hopes of selling them on corporate credit cards." The reasons for this new emphasis are fairly straightforward: annual fees are more common on corporate cards, corporate cards make it easier to establish long-term relationships with customers, and issuers can charge extra fees for multiple cards for a single account.
The reasons for the increase in credit card financing vary. Surely the single biggest factor is the explosion in overall credit card use throughout the United States during the 1990s, when overall economic expansion surged. But there are other reasons for the growing use of plastic by entrepreneurs. For one thing, many entrepreneurs contend that large banks habitually steer businesses that are looking for less than $10,000 to consumer loan departments. In addition, entrepreneurs commonly blame their use of credit cards on the reluctance of banks to provide loans. Moreover, using personal or corporate credit cards allows small business owners to skirt the bureaucratic paperwork associated with obtaining loans from banks or the Small Business Administration (SBA). Also, stories of entrepreneurial success that started with the use of credit card financing have proliferated in the business press in recent years, providing further encouragement to business owners weighing whether or not to take the plunge. Finally, small business owners who use credit cards to pay off business expenses can also use them to stretch their payment periods or earn significant points in frequent-flyer programs.
Nonetheless, Inc. contributor Phaedra Hise noted that "using credit cards is a riskier-than-usual way to finance your company. You have that huge bill to face every month, instead of several smaller ones that can be juggled. Once you max out, you can't pay your bills anymore…. It's a short hop from weakness to bankruptcy. We talked to dozens of successful entrepreneurs who grew their businesses on credit cards, and every one had seen comrades choke and die on the stuff." One major reason for this high failure rate is the interest payments on most credit card offers. These cards generally offer low introductory rates, only to jump much higher within a matter of months. Using personal credit cards for business purposes is also, strictly speaking, a violation of the terms of the consumer-cardholder credit agreement. Finally, an entrepreneur who pours money into his/her business via credit cards, only to have the business fail, will be left with a very poor personal credit history. Given these realities, even entrepreneurs who have parlayed their credit cards into business success caution fellow business owners to pursue other financing options before turning to credit card financing.
If a small business owner does decide to use credit cards to finance a start up or expansion, Hise stated that they need to recognize that "the real secret to credit card financing isn't just to juggle the cards and make the payments on time. It's this: parlay those personal credit cards into corporate-credit history. First, make the credit cards part of your financial plan. (Keep personal and business charges on separate cards.) Second, stick to it. Third, impress a bank with your financial management of the cards and earn a credit line."
Entrepreneur Magazine Guide to Raising Money. New York: John Wiley & Sons, 1998.
Hise, Phaedra. "Don't Start a Business Without One." Inc. February 1998.
Mukherjee, Sougata. "Credit Card Financing on Increase: Less Reliance on Banks, Study Shows." Puget Sound Business Journal. October 3, 1997.
Mukherjee, Sougata. "Credit Cards Financing Many Small Businesses." Washington Business Journal. September 26,1997.
Snavely, Brent. "Credit Card Financing: Tempting but Risky for Small Businesses." Crain's Detroit Business. August 14,2000.
Stolze, William J. Start Up Financing: An Entrepreneur's Guide to Financing a New or Growing Business. Franklin Lakes, NJ: Career Press, 1997.
Survey of Small and Mid-Sized Companies. Enterprise Group/National Small Business United, 1997.