Don’t use credit cards as startup funds, say traditional financial experts. It’s too expensive and risky! However, some entrepreneurs charged the beginnings of their businesses and came out ahead. Should you establish your venture with plastic? That depends. Here’s how a few did it right.
Ultra low loans
Laura Miranti, of Edwardsville, Ill., used credit cards almost exclusively to launch Board Book Albums, a kid’s photo album company. While she had cash in the bank, she chose not to spend it because the money was invested and performing well. And rather than taking out a business loan, she charged.
“Since my husband and I have great credit, we are fortunate to have plenty of zero percent credit card offers to choose from,” says Miranti. “Before the rate hike, I simply transfer the balance to a new card.” The company’s Take Your Pix photo album is now selling on major online retailers such as Amazon, Overstock and Buy.com.
Was it really free financing? Not quite, but close. Miranti acknowledges that credit card companies do charge a fee of about 3 percent to 4 percent of the balance to shift debt from card to card. The cost, though, made sense for her. “I never had a bad experience using credit cards. I found them to be a great source of funding … It’s much cheaper to pay only the transfer fees after a year than to pay interest over that entire year as with a traditional loan.”
A rewarding relationship
Matthew Griffin had a great idea: a pan that ensures that all portions of a baked treat emerge with crusty borders. His Edge Brownie Pan idea won Visa‘s 2004 “great innovators” contest, providing him with $25,000 to get the business off the ground. But credit cards offered Griffin and his venture even further advantages: free stuff.
“For startup, we used several sources of funds — credit cards making up a key component in that mix. We have leveraged those cards for years,” says Griffin. With frequent use came rewards. “All the cards rack up serious points on a monthly basis. We have used the points for corporate retreats to the beach, new tech (iPads!), and even more inventive social outreach like the Xbox with Kinect.”
According to Griffin, credit cards are an integral part of their overall business strategy — even now, after the pan was chosen as one of Oprah’s illustrious “favorite things.” “We use them as value-creating tools,” he says. To ensure the company stays in the black, they “pay the cards off month to month and reap continual rewards — one of which is growing our credit!”
‘We didn’t know any better’
An innocent, take-charge spirit is what Dixie Huthmaker, owner of Huthmaker Violins, located in Duluth, Ga., cites as the primary reason she began her business with personal credit. “We didn’t know any better — that’s the honest answer,” says Huthmaker.
Her simple strategy paid off. “A couple of credit cards solved several financial problems at the beginning, when we couldn’t get money from a bank because we had no business experience,” says Huthmaker. She charged between $5,000 and $7,000 — just enough to buy what they needed to open her doors.
Plastic’s flexibility helped the company in the long term, too. “We could choose to pay the minimums; that was good,” says Huthmaker. Charging helped her establish a provable payment history, which eventually translated into interest-free lines of credit with her vendors.
And regrets? She has none. “If it wasn’t for those two little credit cards, we’d have no business,” says Huthmaker. Today, her company is thriving. What began as a 600-square-foot shop is now the largest violin store in the Southeastern United States and employs seven people.
I never had a bad experience using credit cards. I found them to be a great source of funding … It’s much cheaper to pay only the transfer fees after a year, than to pay interest over that entire year as with a traditional loan.
|— Laura Miranti |
Founder, Board Book Albums
Didn’t need much
When Nicole Galbreath of Nashville, Tenn., was laid off from her accounting job last year, she considered it an opportunity to use her MBA in a different direction. She launched her virtual assistant company, called Task Jeanie.
Unlike some businesses that require a lot of capital to buy merchandise and rent space, the cards in her wallet were all she needed to cover initial expenses. “It was only about $1,000 for licenses, supplies like folders, pens, pencils, printer paper, ink … ” A loan for that sum didn’t make sense, so she simply charged what she required to set up shop.
“As a business major, I learned never to use credit to finance your business, but in certain circumstances, that is not necessarily true. Like for me,” says Galbreath. “I now have five clients — one is in Australia! By the end of this year, I plan to make enough revenue to not rely on the cards.”
Galbreath says she would recommend using plastic to get a business up and running, especially if the overhead is low. Also, the perks, such as coupons and discounts on necessary products and services, keep operating costs down.
Bridge a gap
Marlo Scott opened her cupcake, beer and wine bar, Sweet Revenge, in New York City in 2008. “As a first-time entrepreneur, I leveraged all sources of financing I could get my hands on, including my life savings” and a Small Business Administration loan, says Scott. For late-in-the-game purchases, she used her existing credit card account, a high-limit card that she had since her college days.
“I financed about $20,000 in purchases for my bar and its build out on my personal credit card. At the time, I didn’t have a small business credit card,” says Scott. But after using that card well, she began to receive more offers — one of which was the Chase Slate card, which is geared for small businesses. As it came with zero-percent financing for one year, she transferred her existing balance.
“My Slate card was a huge lifesaver as it allowed me to manage my cash flow regarding the repayment,” says Scott. “2008 and 2009 were incredibly lean times for me as a startup wine bar in the recession on a very sleepy street in Manhattan’s West Village. I had little money coming in to pay the bills and managing my cash burn was critical to survival.” Sweet Revenge more than survived — it earned $570,000 in sales in 2010.
“The only thing I would’ve done differently is I would’ve gotten the Chase card sooner than I did, so I would’ve avoided the hefty finance charges I incurred for that period of time I didn’t have it!” says Scott. In fact, Sweet Revenge has been such a success that she was featured in an Ink for Chase ad campaign.
Before charging ahead …
Using plastic to get a business up and running is clearly not right for all. And some experts are more adamant about it than others.
“We advise against using a credit card to finance a startup, even if it’s a business card,” says Rich Sloan, chief “startupologist” and co-founder of Startupnation.com, out of San Francisco. “Typically, the rates and, ultimately, obligations and penalties are too high to risk using this form of financing.” He does contend, though, that once the business is up and running, “credit cards are extremely important in being able to overcome immediate cash shortfalls by deferring payment obligations up to 30 days.”
On the other hand, Bob Dorden, district director for entrepreneurial development at the Small Business Administration, asserts that credit cards are absolutely appropriate for certain entrepreneurs. “Our thought is that it depends on their own credit and background. If the person has good credit, they’ll have good rates. It all depends on how well they can manage the cards. Some do very well. Very well,” says Dorden.
See related:Credit card balance transfers: What you need to know, Credit card balance transfers: How to find the best deals, Basic rules for business card usage, An ode to credit cards for entrepreneur’s business startup cash