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Credit Cards: A Small-Business Financing Tool

Eric Rosenfeld, President, Adaptive Consulting Partners L.L.C.

In 1997, I broke away from the existing partnership of professional technicians with whom I had worked for several years. At the time, I was the firm's leading partner, responsible for more than $3 million in annual consulting revenues. When I launched my own firm, Adaptive Consulting Partners L.L.C., or ACP, a systems-integration and professional-services company, I immediately did what many small business owners do to secure financing: I approached local commercial banks for the $50,000 I needed to cover costs during the first year.

Just as typically, perhaps, I was turned down. While commercial banks say they want to assist small companies, in fact, what they really want is to loan money to businesses with assets. Although I had built a track record at my previous firm, I now had only myself as collateral, albeit a self with a good idea, a huge amount of resolve and enthusiasm, and a ready set of clients eager to follow me to my new endeavor. Frankly, I was surprised at the chilly reception I received from the banks.

Where to turn? I briefly considered--but discarded--the idea of a loan against my house. I didn't want to put my single largest personal asset at risk. Although I could have borrowed from the assets my wife has in her own name, I would not ask that of her.

So there was only one source remaining: plastic. In deciding to use this form of debt--during those first 18 months, I had up to $20,000 on cards at any one time--I discovered that credit cards have become today's small-business financing tool. If used judiciously, they have more to offer the entrepreneur than even a commercial bank loan. However, credit-card debt is still debt and must be repaid. What follows is a look at how credit-card debt helps the entrepreneur stay focused, as well as necessary tips for using plastic wisely.

Time Is of the Essence

In shunning commercial loans despite their hallowed reputation for respectability, an entrepreneur is making the best use of his or her most valuable asset: time. I, for one, was fired up with passion for ACP, which I differentiated from the consulting pack. In contrast to the methods often followed by my competition, I planned to adapt my staff, my approach, and my recommendations to the needs of each client.

In that critical first year, my most important job was to make my clients love me, and I knew that time was of the essence. I had to spend my time working with clients, rather than negotiating with a bank to process either a commercial loan or an equity line on my house. In fact, realizing that I had to get past the task of securing financing as quickly as possible, I said to myself: What are my resources? What am I comfortable with? And the time for making this decision is up--now!

Only plastic debt matched my need for time-sensitive financing. With lenders willing to make cards available to anyone willing to pay a premium--indeed, some even send checks--credit cards are always there in the heat of the entrepreneurial moment. Whether buying office equipment or advertising space, I knew I would have precious little time to react. Managing my business meant managing my existing clients' trust as well as stretching for the next opportunity. All of my clients need to believe ACP has the substance to survive, and everything from my presentation materials to the way I equip my consultants contributes to that judgment. The immediacy of card debt made it easier for me to make that happen.

Keep Emotion out of Financing

Another advantage of plastic is that it is a neutral financing tool, which fits my business philosophy: never let the business get personal. In shying away from a home-equity line, my wife's resources, or even our savings from a joint account, I was saying that I preferred to keep my business separate.

Why? Because by putting my house or other "safe" assets directly on the line, I would have had to worry about them. Worrying would sap me of the energy I needed to focus on my business. To sustain my energy, I had to eliminate whatever would make me worry. In short, I believe entrepreneurs get what they focus on, and so I never focus on the possibility of failure--only on what I need to do to be successful. This may appear dogmatic, but it works. By isolating my business from my family at all levels, I never fear that I am risking anything more important than business, and that isolation keeps my focus on success.

As a financing tool, credit cards are tailor-made for keeping anxiety attacks in check. Securing and servicing the plastic, after all, doesn't involve meeting with or dealing with a person, as would bank financing. Given the worst possible outcome of a business failure, any erstwhile business owner with marketable skills can land a job and eventually repay. Since I was pegging expenditures to forecasted accounts receivable at all times--more on that in a moment--I also knew I could probably repay even without a salary. In other words, credit-card debt felt safe as well as hassle-free. It was well-suited for someone like me who wasn't afraid to fail on a business level but didn't want to fail on a personal level.

Manage Your Credit-Card Debt

Now, let's be clear. Credit-card debt is still debt and must be repaid; it is also personal debt, so at some level I was risking personal assets. Beyond convincing myself that it was right for my business, therefore, I knew I would have to manage it wisely, and that involves three steps.

  1. Think Installment Debt
    In using credit cards, I treated the debt as an installment loan with fixed payback terms, rather than as an open-ended loan from family or friends. I made it my business to repay card debt in a lump sum pegged to cash flow.

    Specifically, I wouldn't borrow any more than what I knew I could repay within a 90-day period, based on projected receipts. Credit-card companies usually bill after a 30-day grace period, allowing two weeks for payment to arrive. Since I was on top of the amount of cash coming into ACP over the forthcoming 60 days, I always knew that, at most, I'd be out 60 days. Put another way, minimum monthly payments have no place in the lexicon when credit cards are used as a business-financing tool.
  2. Shop Around
    Not one to look a gift horse in the mouth, I took advantage of the lenders' penchant for offering some of the best gift horses around: credit cards with permanent rates as low as 9 percent and introductory offers that sometimes dipped below 4 percent. Throughout my first year and a half, I moved my balance from card to card three times, each time securing a lower rate.
  3. Be Frugal
    Frugality also enabled me to use credit cards as my business financing tool. With payments for equipment, rent, advertising, attorney's services, and the like going directly onto the plastic and appearing on the following month's statement, I had an incentive for weighing every purchase.

    For example, when a postage-meter manufacturer tried to convince me that its equipment was easier than licking stamps, I countered that, for a company on the edge, it wasn't that much easier. I learned not to hire everyone ACP needed, because supplementing the full-time staff with contract workers would be less risky. I always bought less than I wanted and only as much as I absolutely needed and could justify based on future revenue or infrastructure demands. In sum, I didn't consider my credit-card line to be limitless.

. . . . .

It's almost a cliche to say that fledgling enterprises must respond quickly to keep ahead of the competition in today's rapidly changing business environment. What's not so well understood is that credit-card financing--rather than traditional bank loans--allows entrepreneurs exactly that flexibility. When managed wisely, plastic debt enables entrepreneurs to secure the time and peace of mind necessary to focus on the business.

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