Entrepreneurs avoid use of credit cards to fund business

People thinking about starting up their own companies are nearly always on the receiving end of some stern advice: Don’t use credit cards to fund your business.

But the truth is that most entrepreneurs do rely on plastic in the early—and sometimes later—stages of forming their business. A March, 2007, survey done by the National Association of the Self-Employed (NASE) showed credit cards were second in popularity only to savings as the preferred method of start-up funding and ongoing funding for micro-business owners—those with 10 or fewer employees.

When asked what they used for funding, 58% of the 469 survey respondents said “savings” , and 10% said “credit cards” for start-up ; 36% said “savings” , and 21% said “credit cards” for ongoing operations funding. The other choices, including money from friends and family, and bank or home equity loans, came in lower on the list of possible responses to both questions.

Of course, there’s a valid reason would-be entrepreneurs are warned against putting their start-up funding on credit cards. “The worst thing in the world is to have your business fail and be stuck personally with $50,000 in debt at 21% interest,” says Joe Knight, a coauthor of the book Financial Intelligence (Harvard Business School Press, 2005).

The good news is that with some restraint and wisdom, credit cards can function as part of a sensible start-up funding package. “When entrepreneurs take those first trembling steps, most have to take them alone. Credit can help them do that. And it can help them bridge the gap when they know that orders or sales are coming in, or a private investor is going to come through,” says George Whitehead, business development director for the National Endowment for Science, Technology, and the Arts, a public-private partnership that invests in early-stage companies in Britain. “All kinds of unexpected things happen to small businesses . Credit can act as a cushion.” But it’s a cushion that should be used sparingly and with caution, says Gene Fairbrother, president of Dallas’ MBA Consulting and lead small business consultant for the NASE.

Don’t make the mistake of thinking you can rack up debt on a business credit card and then walk away from it if your business venture doesn’t work out, Fairbrother says. So how can an entrepreneur use credit cards successfully to get a company off the ground? Here are some expert suggestions:

“A year prior starting a company, gather every credit card offer that comes your way, so you have a lot of credit pre-approved and accessible to tap into,” says Janice Machala, founder of business and financial services firm Paladin Partners, of Kirkland, Wash.

news source : http://economictimes.indiatimes.com/