Updated: December 30, 2010
Hello everyone, I hope you’re all enjoying the holiday break as much as I am.
I’ll be going back to my regular blogging schedule in a few days but for now, let me give you an interesting guest post about using credit cards when starting a business.
In my previous article on the different ways to raise capital for your business, I mentioned that using credit cards were a viable option.
However, as you will learn below, leveraging on credit card debt to fund your business can be quite risky. Let’s now read what guest blogger, Michael, has to say about this.
When you start a business – no matter what kind it is – you’re going to need at least some amount of capital to begin. To come up with that money, many entrepreneurs turn to credit cards. I will explain why that’s always a risky thing to do, no matter how well you know your business.
A few years ago when I started my internet business, I decided to use my American Express to finance a good chunk of the expenses.
Why? Because my standard APR was only the prime rate plus 0% (that’s 3.25% total). That wasn’t a promotional credit card deal, but rather my normal interest rate. 3.25% is cheaper than a mortgage, so I figured I couldn’t go wrong.
Even after my business began generating revenue, I was in no hurry at all to pay off the debt due to the low rate. But then in fall of 2008, the financial collapse happened.
Shortly thereafter, American Express decided to eliminate the lowest APR tiers altogether for all cardholders (and I was in the absolutely lowest). My 0% + prime suddenly shot up to 8.99% + prime (their new lowest tier available). That meant my interest rate almost quadrupled overnight!
To further complicate matters, my business revenue took a big tumble. Ironically, part of my online business was promoting credit card deals and earning a commission for doing so. However when the credit crunch struck, most banks stopped marketing credit cards and for the few that still did, they were barely approving any applications.
I managed to pay off the entire balance within a couple months after the rate hike, but in order to do so I had to sell off stocks at a heavy loss (and at the worst time to sell, at the bottom of the market). So I technically came out of the mess debt-free, but I still lost a lot of money in the process.
What I learned was that no matter how well you think you’re managing risk, there are always those unknowns that can happen that you never saw coming.
I thought that I was doing the smart thing by having credit card debt at only 3.25% but look what happened? This is why raking up heavy business credit card debt is never safe. At least with a mortgage your rate will be fixed for 15 or 30 years, but with credit cards, your rate could change at any given moment.
As an alternative to credit cards, if you plan on carrying the debt for an extended period of time (more than a few months) you may want to consider small business loans if you can lock in a good rate.
The drawback of going this route is that these loans won’t have a 0% intro rate like many credit cards offer, but the benefit is that you can lock in a fixed rate for 1 to 5 years. And that way your interest and payments will be completely predictable because the rate is fixed for the duration of the loan.
This guest post is contributed by Michael, founder of Credit Card Forum. Aside from writing about credit card deals, he also provides helpful tips on how to manage credit card debt. One of his most recent article is How To Pay Off Credit Card Debt Quickly.
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