Credit Cards Replace Small Biz Loans
The 30% interest rate on their small business credit card shocked James and Heather Hills enough to stop using it entirely in April.
The couple had turned to credit cards in early 2006 to get their Elgin (Ill.) startup, mhn Internet Marketing and PR, off the ground, after three loan officers told them that they wouldn’t qualify for a bank loan without capital equipment to put up as collateral.
So the Hills, who have no outside employees, took out a $50,000 home equity line of credit and two personally guaranteed small business credit cards.
While data on small business borrowing is scattered, indications show that entrepreneurs are increasingly relying on credit cards to finance their businesses, especially early-stage companies.
The percentage of firms using credit cards has jumped from 16% in 1993 to 44% today, according to surveys by the National Small Business Association, a trade group. In the same period, the proportion using bank loans dropped from 45% to 28%.
A Federal Reserve survey showed that the percentage of firms using business credit cards jumped from 34% in 1998 to 48% in 2003. And numbers from the NSBA and the Fed show that between 20% and 30% of all small businesses carry a revolving credit-card balance, rather than paying their bills in full each month.
Over the last decade, credit-card companies have courted small business owners as issuers try to expand beyond the saturated consumer card market. Some 12% of the 6 billion credit-card offers mailed each year promote small business credit cards, according to Mercator Advisory Group, an industry researcher.
That’s 720 million offers, or roughly 26 for each small firm in the U.S. “As issuers have discovered the small business segment, they have become fairly aggressive about getting small business cards into the hands of some very early-stage businesses,” says Mercator analyst Ken Paterson.
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Photo by LotusHead.
Dustin Serviss on August 28th, 2008 9:18 am
If you are caught in this trap have a look at how you can easily consolidate your credit cards, line of credits and mortgage into one account. This is called a Manulife One. It will take you 2 minutes to see how easily you could be saving interest immediately as well as cutting your mortgage payoff time considerably. Not only will this produce interest savings but the account will allow you more flexibility to live a better life.
http://www.serviss.ca/manuoneintro.html
I hope you enjoy and if you or your friends/family members have any questions feel free to send me an email. Contact info can be found at http://www.serviss.ca.
Take care
Dustin
Angela on August 28th, 2008 3:09 pm
The couple mentioned here with the 30% rate is exactly why a credit card to fund a business should be a last resort. Credit card companies always seem to find an excuse to raise rates. Although it can be useful and they are great when everything else seem to be a dead end, but they can also hurt worse than a loan ever would have.
I once read somewhere that it’s best to try for small loans from friends and family and funding the majority of your business on your own savings. It may take longer to get off the ground, but there will be no interest on what you’ve put in.
cassy on August 29th, 2008 6:51 pm
Credit cards is a great tool and can makes life easier but we should also know that if we are not going to use it wisely it can create a huge financial burden to us.
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