It worked for Charlene Connell, who relied on her 10 credit cards while starting Vital Resources. "There were times I needed to make payroll and hadn't gotten paid for our services yet," she remembers. "After Friday payday, I would wait for Saturday's mail. If the checks didn't come, I'd run to the bank machine and get cash advances and deposit them, and then hope everything worked out with the floats. My 6-year-old daughter thought it was great how you drove up, pushed some buttons, and money came out."
Connell quickly racked up close to $25,000 in debt. "In the first six months I was making minimum payments. Then after generating more income, I could pay them off--and I took care of those cards before I took care of myself."
After a year and a half, Connell's accountant introduced her to a loan officer at a bank that had previously turned her down for a line of credit. "The bank said I hadn't been in business long enough. We were a little under a million dollars in sales," she says. What changed the bank's mind was Connell's excellent record of managing her personal credit-card debt. The bank awarded her a $25,000 line, the amount her history showed she needed. "And then I cut the cards up," she says. "I enjoyed that very much."
Even with rigid financial management, credit-card financing can have its downside. "I ruined my personal credit at the expense of the business," says Jeannette Lee, CEO of Sytel Inc., an information-technology consulting company in Bethesda, Md. Lee started the company in 1987, and her government clients sometimes took months, even up to a year, to pay her. She turned to personal credit cards to get by. "We were maxed out on 15 or 16 cards for about five years. We struggled to meet monthly minimum payments. It was an endless spiral--the debt increased exponentially. I only just paid off the last two of my MasterCards in 1996." Even now, when her profitable company has placed 64th on last year's Inc. 500 list and she pulls down a salary of $200,000, Lee's credit trouble dogs her. "I wanted to apply for a new card to consolidate the three I have, and I got some rejections," she says.
Despite card issuers' attempts to press small businesses to apply for another "product," like a corporate card or line of credit, those services are sometimes difficult to qualify for and more expensive to use. Our anonymous West Coast CEO says that his credit-card company is pushing him to switch to a corporate card, but he's loath to give up his frequent-flier miles. Card companies are rethinking their corporate-card policies, including the possibility of awarding cards to younger companies. (See "Credit-Card Issuers Want You," below.)
Still, the days of ready corporate credit for start-up businesses are far in the future. For the moment it seems that capitalizing with credit cards will remain a Faustian bargain. As Lee says, "it was horrible. Don't resort to cards because they're easy. Try any other financing first--friends, family, borrowing, anything. Credit cards are a last resort."
Phaedra Hise is a contributing writer at Inc.
Credit-Card Issuers Want You
Consumer credit cards are for personal use only," says Shelley Ehrman, vice-president of commercial-card services at NationsBank in Charlotte, N.C. "Buying inventory, for example, violates the terms of the agreement. So would taking a cash advance to meet payroll." Still, until recently, credit-card issuers paid scant attention to those types of purchases on the personal cards that so many small-business owners use to get their companies up and running.
Today a dramatic change is in the making. 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--an estimated $75-billion to $100-billion market--in the hopes of selling them on corporate credit cards. Not only can the issuers make more money from corporate cards--they charge annual fees, for instance, and demand extra fees for extra cards--but they're also more likely to hang on to customers longer if they can sign them up for corporate-card services. So it's no wonder that credit-card companies want to turn consumer cardholders into corporate cardholders. And technology is on their side.
Basically, credit-card issuers only recently have discovered what a gold mine small businesses can be. Traditionally, they regarded small companies as a high risk--and thus set up restrictions that excluded many businesses. Thanks to the expanded abilities of computers, issuers now have more sophisticated standards for evaluating risk. One of those technologies, often called credit scoring, can create risk profiles of cardholders. Using analysis software, the issuers can pick out the small-business customers from among their consumer cardholders by looking for heavy traffic in areas like midweek travel, car rentals, office supplies, computers, and copy-shop printing.
"We can keep and retrieve information very quickly to know what profile of borrower will repay the debt," says Kendall Spencer of Barnett Bank, in Jacksonville, Fla.
And credit-card issuers are tripping over one another to woo those low-risk small-company owners away from personal cards to an assortment of new business services. That means you may actually get a solicitous call from your American Express, Visa, or MasterCard issuer--they're all hawking small-business corporate cards. The card perks include discounts from popular vendors, concierge services, and financial consulting services, among other things. "We're taking credit cards beyond being a credit card," says Richard D'Ambrosio, spokesman for American Express Small Business Services.
Steve Abrams, senior vice-president of corporate products at MasterCard International, sizes up the small-business market: "It's a good-quality market segment, with low delinquencies, not as much bankruptcy, and less fraud compared with the consumer side."
Finally, some respect.
SPECIAL REPORT: HOW TO FINANCE ANYTHING
