If your mailbox is filling up with 0-percent-interest credit card offers, they could be a good source of small-business financing. But you have to use these balance-transfer deals strategically, say experts, or you could run into trouble
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If your mailbox is filling up with 0-percent-interest credit card offers, they could be a good source of small-business financing. But you have to use these balance-transfer deals strategically, say experts, or you could run into trouble.
“They can be very beneficial for folks who have seasonal lulls in their business, but can be dangerous if there is no set plan for repayment,” says bankruptcy attorney Michael J. Gunderson at The Gunderson Law Firm in Chicago. “Often I see people get pulled in by these offers and [they] aren’t prepared to make the new minimum payments.”
While banks are beginning to lend more to small firms than they did during the recession, it can still be difficult to get very small loans, which require a lot of paperwork for banks, relative to the revenue they generate for the institutions. The National Small Business Association, a nonpartisan advocacy group in Washington, D.C., found in its year-end report in December 2013 that 33 percent of business owners surveyed had used credit card financing in the previous year.
Many owners were paying rates well above 0-percent interest for their credit-card debt, according to the NSBA’s research. The average interest rate among respondents was 13.74 percent. Zero-percent deals for balance transfers and new purchases — which have made a bit of a comeback after tapering off in the recession — can lower the cost of small-business financing, but if you don’t keep track of when these offers expire, you can run into trouble.
“They call them ‘teaser’ rates for a reason,” says Gunderson. “People are lulled into a false sense of safety with no-interest payments, only to have a shock when the rates are put into place. Cards give people these rates to encourage large purchases, which, if not paid off in full before the expiration, mean significant interest payments.”
Secure as many no-interest cards as you can
If your startup requires a substantial amount of cash, you may need more than one card. When Vladimir Gendelman started Company Folders in 2003 after losing his job, he says, “I got as many as I could.” Ultimately, he ended up with $50,000 in available credit. Because he had recently become unemployed — a red flag for card issuers — he was quick to apply before his unemployment became apparent.
To avoid getting in over his head, Gendelman — whose firm sells products such as paper folders decorated with clients’ logos from its headquarters in Keego Harbor, Mich., near Detroit — created a spreadsheet to keep track of payment deadlines. “It’s easy to lose control and forget to pay something,” he explains.
If you do pay your credit card bills on time, this will likely lead to more offers from issuers. “As you successfully make payments and don’t delay anything, they want to give you more,” says Gendelman. As he reached the 10th or 11th month of a 12-month, 0-percent-interest deal, he would secure a new 0-interest card and transfer the balance to that card.
Financing his business this way gave him the runway he needed to establish it successfully. Today, he says, Company Folders brings in about $2 million in annual revenue.
They call them ‘teaser’ rates for a reason. People are lulled into a false sense of safety with no-interest payments, only to have a shock when the rates are put into place.
|— Michael J. Gunderson|
The Gunderson Law Firm
Reap rewardsyou can reinvest
There’s no point using your finite pool of startup cash for a business expense if you can instead finance the purchase with a no-interest credit card. Save your cash for times when you have no other payment options, advise entrepreneurs who have gone this route.
After she was laid off from an internal marketing position at Hewlett-Packard in 2012, Wanda Anglin, a resident of Katy, Texas, used the 0-percent interest credit card deals piling up in her mailbox to finance startup costs at her firm SEOBuzz, which does search engine optimization. Anglin used a deal from Chase Ink to cover the $13,000 it took to set herself up with things such as a computer and smartphone and a rented post office box. Anglin, who secured the card in June 2012, says she paid off the entire debt by July 2013 — when the deal expired. Meanwhile, she received cash-back rewards, which she used to cover other expenses. This year, she says she is on track to match her former income from HP at the one-person firm.
Don’t pay your debt prematurely
Billy Thompson, president of The William Thompson Co., had to find a way to finance substantial startup costs when he launched a business in 2010 to sell an undershirt he invented to keep the wearer’s perspiration from showing — the Thompson Tee.
Thompson, who sold blocks of time on private aircraft in his previous job, had to complete his prototype, file a patent application and get the business set up as an LLC. Salvation came in the form of several 0-percent interest credit card offers, which allowed him to borrow $12,000 in 2011 and 2012, using convenience checks the issuers sent in the mail. As one teaser rate expired, he rolled the amount onto another card offering a 0-percent-interest deal, postponing the day he had to pay everything back. Meanwhile, he made the minimum payments, to stretch his available cash.
After Thompson brought in a partner who had substantial experience in domestic apparel production, the company’s e-commerce business took off. The profitable company, based in Orange County, Calif., now sells its undershirts through its own website and an Amazon store. Thompson projects more than $1 million in revenue for 2014 and has paid off all of the credit card debts he took out to fund his startup costs, he says. “We could have paid it off a lot earlier — but you want to conserve as much cash as you can,” he says.