HITS & MISSES in Small Business

Everyone knows that credit cards are a double-edged sword. They’re easy and convenient to use, on the one hand, but they are also a risky way to borrow more money than you can quickly pay back. With interest rates and penalties high, many consumers have learned to be wary of forgetting about budgeting and saying, "PUT IT ON MY CREDIT CARD".

But what about small-business owners? Struggling to establish themselves and finding financing tough to obtain, many entrepreneurs use their personal credit cards as an important source of financing in the early years of their businesses, and even beyond. A National Small Business Association and Arthur Andersen survey reports that only 6 percent of all small businesses were operating with SBA loans, and a mere 2 percent has found venture capital to fund their start-ups. About half of small businesses in the survey used credit cards to pay for either starting or expanding their operations. The National Federation of Independent Business reports that smaller firms with sales under $500,000 and under 10 years old are most likely to use credit cards for working capital.

Diana Frerick is a case in point. She has used credit cards more than once to finance start-ups in the karaoke business, most recently to open Karaoke Star Store & Stage, an equipment retailer that now has 14 employees and more than $2 million in revenues.

Matt Jung and Chip George had a less positive experience ‘We had no assets,’ says Jung of their start-up. ‘We were taking anything we could get.’ After relying on credit to buy raw materials and finance operating costs for their beanbag chair company, Comfort Research, they found themselves deep in debt despite rapid growth and revenues $2 million. It took years to pay off the debt and accumulated interest. ‘It’s a very expensive way to borrow money,’ says Jung of his experience with credit cards. ‘I think they should be a last resort.’

Steve Rotermund, who ruined his personal credit to keep his passenger-jet cleaning company afloat several years ago, still has trouble buying consumer goods on credit. His advice to fellow entrepreneurs is, ‘Try to get money other ways if you can. Anything is better than credit cards.’

Nevertheless, when used wisely, small-business credit cards can be convenient for entrepreneurs. “A credit card with $10,000 limit could provide you with enough working capital to purchase equipment or furniture, or pay for a marketing campaign,” says the executive director of the National Association of Women Business Owners. Paying attention to the interest rate and other details can help business owners make wise decisions about credit, as can setting up a separate fund to fall back on it the business falters. Many financial institutions offer small-business cards with no annual fees and zero interest for the first six months. “What the small-business owner needs to do is compare,” says an economist with the SBA.