Tweet

Catch-22 Leads to Credit Card Debt

Guest post by: Kerri Salls

Article Overview: A Catch-22 (def) is a logical paradox wherein you find yourself in need of something which can only be had by not being in need of it.

Catch-22 Leads to Credit Card Debt

A Catch-22 (def) is a logical paradox wherein you find yourself in need of something which can only be had by not being in need of it.

When you are starting a business or investing to break through to the next level (sales, volume, support, equipment, etc), that’s when you need cash most. The irony is that ‘no one’ wants to bank on you and your business when you need money but they come out of the woodwork ready to lend you as much money as you want, once you do breakthrough to success and don’t need their money anymore. Doesn’t that fit the definition of a Catch-22?

Whether it’s the booming market we had in the 1990s or a much tighter market like we are recovering from now, small business and sole proprietors in particular are generally locked out of the capital markets.

Resourceful, determined business owners often turn to their credit cards to fill their company’s equity gap. But research findings from a study: The Use of Credit Card Debt by New Firms, released by the Ewing Marion Kauffman Foundation confirm some worrying consequences:

· “Startup firms with continuing high balances have reduced likelihood of success”

· “Credit card debt reduces the likelihood that a new business will survive its first three years of operation”

The study suggests that, during many firms' first few years of operation, their credit card debt increases and then eventually stabilizes to manageable levels; while firms with high credit card debt close-up, and successful firms start paying off their debt.

It’s no surprise that more than 50% of all new businesses rely on debt financing when they begin operation. The size of the business is not a factor. There are many sources you can pursue for funding your business; however, a solo business owner is rarely eligible to apply for any of that funding. Then again, most of us are not interested in putting our family home at risk. Nor do we have wealthy investor relatives to bankroll the business.

When you look around for quick equity to invest, credit cards become very appealing as a means to self-fund a small business or sole proprietorship.

· Credit cards help you manage finances

· Credit cards streamline payments

· Credit cards are easier to get than a traditional bank loan or government business grant

· Credit cards smooth revenue streams – especially in the startup’s early stages when expenses exceed revenues.

· Credit card companies never come back and ask you how you spent the money.

In the Kauffman Foundation study, about 58% of the surveyed firms relied on credit cards to finance their first year of operations.

The study results found that every $1,000 increase in credit card debt increases the probability a firm will close by 2.2 percent.

While it’s relatively easy to get a credit card with a line of credit for your business, you should keep in mind a few caveats:

· Credit card interest rates are extremely high

· Credit card companies are very unforgiving about late payments and over limit expenditures

· If you intend to fund your business with credit cards, it is easier to get approved before you start your business, preferably while still employed by someone else.

· Because this kind of debt financing is so expensive; you must plan, budget and monitor your spending very carefully monthly if not weekly.

If you use credit cards in your business, how much of a balance do you carry?

By the calculation above, if you carry $2,000, you have a 4.4% probability of closing this year, so on this scale, you are in good shape. But if you carry a credit card balance of $15,000 (x 2.2%/$1000) that’s a 33% probability you won’t be in business by the end of the year!

If that sounds like your business, or if you were considering going deeper in debt to fund operations this year, think carefully how you intend to generate revenues to cover expenses AND pay down that debt.

To avoid a credit and borrowing catch-22, an alternative option is to self-fund your business with credit cards. That way, you don’t have to ask for approval or permission from anyone.

Related Articles
  IS IT TIME TO CUT UP YOUR CREDIT CARD?
  Credit Alliance Group understands that every dollar counts in paying off your credit card debt
  Credit Alliance Group has discovered that Banks and Collectors Have a New Twist on the Old Bait & Switch Tactic
  Business Credit Cards versus Personal Credit Cards
  Debt Reduction Tips Every Joe Needs
  Tips to Take Control of Credit Card Debt
  Important Facts about Credit Counseling
  Facts About Bad Credit Unsecured Credit Cards
  Debt Help, Money Management Techniques
  What To Look For In A Debt Settlement Company
  Credit Alliance Group Knows You Need Help With Debt?
  College and Credit Cards
  A True Business Credit Card
  Credit cards: how do we use them?
  How the Banking Credit Card Fiasco Affects YOUR Business
  How Does Debt Settlement Affect My Credit?
  The Easiest Journey in Business Education
  Strategy of Eliminating Debt through our Consolidation Method
  Consolidation Debt Management Money
  Reduce Your Debts

Article Tags: breakthrough, business use of credit cards, catch22, credit card debt, debt financing, next level, small business, sole proprietor, start a business on credit cards



Related Forum Posts
credit cards - Nana, you can get a credit card! Get a Secured Credit Card. It's a Visa or MasterCard which is a hybrid of a chequing/credit card. There are two types: 1. You put in an amount that you would like to have as your credit limit in $500 increments as security and you you can either pay in full each month or make minimum payments 2. You can have a credit card linked to your chequing account and you can spend only has much as you have in your chequing account. I recommend #1 and they both go to improving your credit limit.
Building credit - Credit is like reputations, I suppose. Takes a lifetime to build, and only a second to destroy.
Re: 3 Ways to Grow Your Business in 2011 - Hi David, I've had a lot of success by building my own media list and then emailing out the reporters when I have a story. I've also used PR Leads (paid program) which got me into the New York Times and Forbes. I haven't done much with online press releases - from what I hear they can help you with your SEO but they don't get much mainstream media attention. Let me know if you have any specific questions and I'd be happy to help!
Marketing and PR ideas related to a Credit Organization - Hello Everybody! I would be very grateful if you suggested some PR and Marketing ideas for a Credit Organization which target market is poor public who live in village and haven't any access to the internet. Thanx in advance
Offer Credit instead - I'm not sure if ChrisH was referring to this but i'll state it more expicitly .. Charge upfront and offer a refund of double the value back in "Credit" towards your Product or Service you have for sale at the end of the event.


Share this article with your friends. Fund someone's dream.

Leave a comment below or share on the left and you'll help support entrepreneurs in Africa through our partnership with Kiva. Over $50,000 raised and counting - Please keep sharing! Learn more.

Newsletter

Get advice & tips from famous business
owners, new articles by entrepreneur
experts, my latest website updates, &
special sneak peaks at what's to come!

Name:
Email:

Popular Articles

Sales Courage and Resilience

Soda Vending Machine = Energy Hog

How to sell a business

Suggestions

Email us your ideas on how to make our
website more valuable! Thank you Sharon
from Toronto Salsa Lessons / Classes for
your suggestions to make the newsletter
look like the website and profile younger
entrepreneurs like Jennifer Lopez.