Bootstrapping your entrepreneurial venture until customer orders are secured or a significant funding round is closed, frequently involves maxing out a credit card or three. I recall one startup founder recounting that at one point in her startup journey, she couldn't afford a swipe on the New York City subway because her credit cards were completely maxed out.
She's not alone in relying on credit cards to make her American Dream happen.
Statistics cited by the U.S. Small Business Administration indicate that more than 65% of small businesses owners use credit cards on a frequent basis (to fund operations). One in four small businesses cannot access adequate financing (according the to National Small Business Administration (NSBA)). The 2015 Year-End Economic Report from the NSBA indicates 31% of small businesses are accessing credit cards to meet capital needs of their business.
While credit cards may be a handy (or necessary) way to pay, relying them as a financing source is less than ideal.
The NSBA 2015 Year-End Economic Report also indicates that nearly one in five small firms:
- experienced an increase in their lines of credit or credit cards (a good sign that lenders may be slightly risk averse to lending to small businesses than previously); and
- indicated that a lack of available capital has hindered them from financing inventory (and increasing sales).
Increased sales, leads to increased ability to hire additional employees. In 2011, according to U.S. Census Bureau data, there were 5.68 million employer firms in the United States. Firms with fewer than 500 workers accounted for 99.7 percent of those businesses, and businesses with less than 20 workers made up 89.8 percent. Small businesses are the American Dream and America's employer.
As to whether credit cards (though readily accessible and widely used as a financing source) is a viable, medium to long-term solution for small business, I turned to Rebecca Martinez, Vice President of Communications at LiftFund.
Credit card debt is a viable solution for small business financing, the issue is the interest rates impact as the money costs more than other sources of funds. A credit card's rate is aligned with a credit score and if your score is sub-prime you are paying a lot more for your capital.--Rebecca Martinez
LiftFund is a a 501(c)(3) nonprofit organization, that has been helping small business owners and entrepreneurs achieve their business goals by providing small business loans to those owners who do not have access to capital from other lending sources. Since opening the doors in 1994 in their first office in San Antonio, Texas, LiftFund has made more than 17,000 business loans totaling more than $210 million. LiftFund also provides educational services at no cost to borrowers.
If you need to rely on your credit card in the short-term to fund your business, Rebecca offers up these credit suggestions for small business owners:
1. Set goals for revenue generating and see if you can finance your business with your sales. This may mean you have to start off small, but self-financing not only reduces your debt it also allows you to know how much debt you can take on.
2. Assess your financials. No matter how simple or complex, you should assess your expenses and income and keep a pulse on them to know how well you are doing. One thing you want to avoid is financing your business from being reactive. Being proactive by consistently assessing your financials will place you in the driver's seat.
3. Save. Saving money, even if it is a small amount it can go a long; whether it's saving $5 or $500 this will help in showing you are disciplined and you can leverage it for a loan.
4. Know your credit score and history. You should always have a sense of what your credit score and history is. This again will allow you to know any issues before a lender does--your credit score and history play a big role in how much money you are able to borrow and how much it will cost you. Typically, the lower the credit score, the lower the dollar amount and higher the interest rate.
5. Know what you own. Knowing what you own 100% or what a business loan will help you finance is important as most lending uses collateral to leverage the loan. This concept at LiftFund is called skin in the game--it shows you care and will repay us.