I had a client for years that ran a successful business. He financed his business largely with credit card debt. He was able to accomplish this by being “viciously” organized in his cash flow. By vicious, I mean the owner had a laser focus on each card’s balance, payment due date, interest rate and terms. In fact, he’s the only business owner I’ve ever worked with who was able to transfer balances between cards to take advantage of 0% “teaser” interest rates.
Most owners go to credit cards for financing when traditional sources (bank loans, investors, issuing debt) are not available. The businessperson takes out credit cards out of desperation. The more risky the venture, the less likely financing can be obtained. This was particularly true during the tech boom of the late 1990s.
Most companies are not well organized and do not take the time to understand the terms of their credit card agreements. As a result, they make payments late or go over their credit limits. They end up paying far more in interest and penalties than they would in a traditional bank loan.
The Lesson: Unless a business owner is well disciplined, financing a business using credit cards is far more expensive than traditional loans.
Your Homework: What has been your experience with financing? Have you been disciplined in your use of credit?
(Source: “Small Firms Use Credit Cards for Capital”, Wall Street Journal, 7/24/07)
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