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When is it OK to Fund Your Startup with Credit Cards?

By: Susan Solovic

 

When is it Ok to Fund Your Startup with Credit Cards

We are fortunate to be living in a time when new financing options for funding your small business are popping up every day. However, they all come with limitations. Here is a super quick rundown of some:

  • Banks. Hesitant to loan money to unknown founders.
  • Crowdfunding. With some the money you raise will be taxed as income, with others you have to give away a piece of your company.
  • Credit card processors. PayPal, Square and others will lend to businesses, but the business must have an established cash flow.
  • Venture capital. VCs will take an ownership share.

Despite all of these options, running up one or more personal credit cards is still one of the most common ways people finance new ventures. Of course, whenever credit card balances get maxed out, there can be severe consequences. Yet sometimes it works out quite well. Google founders used all of their credit cards to get going. But let me tell you a story about another startup that very wisely used credit cards to get established.

When Max Shevyakov and Mark Gurevich founded Borrowlenses.com the main roadblock to growth was a lack of lenses. Camera lenses are, as you probably know, quite expensive. They were getting started at a time when credit card offers were arriving in the mail just about as fast as drug store sale flyers.

They started buying lenses with as many credit cards as they could get their hands on. They rolled over balances into to new “zero-interest-for-a-year” credit cards when a card would get maxed out—or the zero-interest grace period was about to end. Was this credit card lens buying spree sheer madness? No, for a couple of very good reasons.

Two important principles

The first, and most important reason this was a sound business idea is because even though their cards were maxed out, they controlled significant value with the lenses. If their business failed, they knew that the lenses could be sold, raising a fair amount of the money required to pay down the credit cards.

Secondly, after having operated the business for a while, they knew exactly how much revenue they could get out of a lens over a given period of time. They were working hard to keep up with demand. Lens rentals turned over in a very predictable way. They could easily calculate their ability to make their credit card payments.

Related Article: How to Build Credit as a Small Business Owner

The lesson here is that if you buy a tangible asset that holds its value fairly well, you can significantly limit your risk. Further, if you understand your business—which you should—you can judge your ability to meet your monthly obligations. When these conditions are met, consider credit card debt, albeit carefully. By the way, Google founders ran up their credit cards to buy hard drives—another tangible asset.

However, if you are taking cash out of your credit cards to pay for overhead, operating expenses or salaries, it’s a different story. Employee Joe Doe isn’t going to give you any of his salary back when you have trouble making a credit card payment. Your landlord isn’t going to rebate your rent when things get tight. You can’t take back electricity you consumed last month.

Borrow too much on your credit cards under those conditions and it’s “lights out.”

Published: September 14, 2015
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Source: Susan Solovic

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Susan Solovic

Susan Wilson Solovic is an award-winning serial entrepreneur, New York Times, Wall Street Journal, Amazon.com and USA Today bestselling author, and attorney. She was the CEO and co-founder of SBTV.com—small business television—a company she grew from its infancy to a million dollar plus entity. She appears regularly as a featured expert on Fox Business, Fox News, MSNBC, CNN, CNBC and can be seen currently as a small business expert on the AT&T Networking Exchange website. Susan is a member of the Board of Trustees of Columbia College and the Advisory Boards for the John Cook School of Entrepreneurship at Saint Louis University as well as the Fishman School of Entrepreneurship at Columbia College. 

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