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.
NEVER AGAIN: CEO Michael Fuori borrowed from his father to start a bar. Now he frowns on family funds.
Back in 1985, when he was 23, Michael Fuori, CEO of Lindin Consulting (#338), borrowed $25,000 from his father to open a bar in Levittown, N.Y., on Long Island. Twelve months later Fuori sold the bar and paid back his father, but his year with a liquor license was one he won't forget. He says that even though the bar broke even, his relationship with his father changed. Simple family conversations about how his day had gone grew touchy. If Fuori lodged the slightest complaint about his venture, his father was quick to say, "Twenty-five thousand is a lot of money," or, "You wanted into this business, not me."
Things bottomed out one Friday night when Fuori noticed two bouncer-sized men sitting at the bar, drinking nothing but water. Whenever Fuori moved to another part of the joint, the two men followed him. Finally, he asked them what they were doing. "We've been sent by your father to make sure nothing happens to you," was their answer, he recalls. A few months later Fuori got out of the business. "Believe me," he says, "that was the last time I ever borrowed from relatives."
To prevent family capital from interfering with family caring, Hutcheson recommends that entrepreneurs approach their relatives only after they have secured investments or loans from unbiased outside sources. "Go and get matching funds," he says. "If you need $25,000, then first get $12,500 from others before asking your family for the rest. If you can't do it that way -- and if you don't have your own skin in the game -- then you need to think twice about why you're asking someone you love to give you money. I believe you should get others to back the idea as well, so a parent or relative doesn't feel as though the money is a gift but rather a worthwhile investment. It puts a higher level of accountability into the entire process."
"Think twice about why you're asking someone you love to give you money."
7. Should I think twice before signing on with VCs or angels?
Yes, especially if you can get money somewhere else. Raphael Amit, professor of entrepreneurship and management at Wharton, describes the current investing climate as an "onerous" one for entrepreneurs. "Today you have to realize that venture capital is the most expensive financing you can get," he says. These days, notes the professor, venture capitalists aren't content to give cash for equity. To offset the increasing risks of today's market, many VCs are structuring their investments as a mix of debt and equity.
Of course, you might be in a start-up situation where you need funding from VCs or angels to survive. If that's the case, then Amit advises you to perform as much due diligence on the investors as they'll perform on you. "What will their attitudes be when your company hiccups? What will they do if you don't meet your forecasts, sales slow down, or you're out of cash? Talk to the other companies in their portfolios and ask, 'Did they work with you, help you, or fight you?' "
