The Numbers Game

Banks will come through with loans if you can convince them that doing so isn't risky business. If a bank won't lend you money because your company looks iffy on paper, try for a loan backed by your personal assets. That's what Stephen R. Satterwhite, founder of Entelligence (#320), did in late 2000, when a dot-com customer that owed him $250,000 closed down overnight. Suddenly, Entelligence faced a cash crunch and needed financing to meet expenses. Satterwhite explained the problem to his company's banker, who offered to extend a $150,000 line of credit but required that the loan be secured not only by the company's assets but also by the personal assets of Satterwhite and those of an Entelligence investor and board member.

28 ^% of the Inc 500 CEOs surveyed tapped their cofounders' personal assets to start their companies.

Still in need of $100,000, Satterwhite approached his private banker. The banker gave him a $100,000 line of credit. "He never even hesitated," recalls Satterwhite. "He required only my personal guarantee, and he was just a super guy about it."

5. Credit cards -- how many are too many?

The answer to that question depends greatly on your willpower and personal risk tolerance, because let's face it, the credit-card solicitations will keep coming in the mail. And there's no legislation afoot that's going to stop them from coming, according to Elizabeth Warren, a Harvard Law School professor who specializes in bankruptcy law.

PRICELESS: Entrepreneur Kelli Greene funded her start-up with $50,000 in credit-card debt.

There is, however, a movement in Congress to pass a bill that would make it a lot harder to file for personal bankruptcy. (At press time, in early September, the bill was days away from coming to the floor in the House. As you read this, the bill may in fact be a law.) According to Warren, the legislation hits entrepreneurs harder than it hits anyone else. "About one in seven filers is a failed businessperson," she says.

In principle, the bill (the Bankruptcy Abuse Prevention and Consumer Protection Act of 2002) aims to prevent consumers from using bankruptcy laws to escape from debts that they have the money (but not the will) to pay. The bill claims such a determination will be made by focusing on a filer's income and expenses. But by focusing on just household expenses -- and not including business expenses -- the bill will have a disproportionate effect on entrepreneurs, claims Warren, because household income "tends to be higher for entrepreneurs, even though their expenses are also higher -- and the bill makes no allowances for business expenses."

62 ^% of the Inc 500 CEOs who raised additional financing borrowed money from a bank.

So if you want to start a business with a dozen low-rate credit cards, go ahead, but know that it might get a whole lot harder to use bankruptcy as a safety net.

Despite their potential pitfalls, credit cards offer the advantage of speed. Unlike loans from banks, for which you have to prepare forecasts and impress your lenders in person, credit-card capital requires little legwork. That was the main appeal of credit-card financing for Kelli Greene, who used 10 credit cards plus her savings to launch Pacific Data Designs (#160) in 1994. Greene had a day job and spent all of her downtime developing the software that would eventually become the company's hallmark product. "I had no time to talk to a bank, and I didn't want to make the effort of writing a plan," she says. The credit cards, which together accounted for about $50,000 in cash advances, funded Pacific's first 20 months. After that the company generated enough cash flow from its operations that it didn't need financing.

6. I don't want to mix family and business, but I might have to in order to get the money I need. What might make it less painful?

"The borrower should commit in writing to the plan," says James Olan Hutcheson, president of Regeneration Partners, a Dallas-based consulting group that specializes in family-owned businesses. "Write down how the money will be used, how it fits in with the business plan, and how it will be paid back." Hutcheson also suggests running the arrangement by your accountant so that the IRS doesn't misunderstand your intentions. Among a handful of potential problems: the IRS may construe an investment or a loan as a gift. Imagine, for instance, that after your brother has lent you money, your company fails and you're unable to pay your brother back. The IRS will not allow your brother to take a tax loss on a "gift." And then there are the emotional issues surrounding family money.

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