Credit cards have become an increasingly popular substitute for traditional sources of capital, such as business loans from banks and venture capital. More and more startup founders are saying “load it up” to fund their startups and ongoing operations.
The problem of new businesses and traditional sources of capital
Nascent entrepreneurs without an established business history or track record of successful financial performance often complain about the difficulty of dealing with banks. It’s not easy to appease bankers who want to see three or more years of past financial records, positive cash flow, an established customer base and other historical performance indices when a business is new.
The alternative for the start-up entrepreneur in a formal loan process is to offer substantial guarantees. What this means is that the founder of the company promises something of value, making sure that if the entrepreneur’s “best plans” don’t come to fruition (which is a good bet, given the high rates of business failure), the bank has something to fall back on. in and a means to pick up. To further thicken the stew, it could be considered that the liquidated value of some forms of pledged collateral may be much less than the value of the collateral in more favorable circumstances. An example of the above would be inventory or office furniture. How much can you get when you sell used office furniture at auction? Suffice to say, the bidders are in that auction versus an office furniture showroom for a reason: They don’t want to pay top dollar for anything they buy.
Put on a pair of banker’s shoes
Chances are good that if you were wearing a pair of banker’s shoes, you would be reluctant to lend money yourself. After all, what is the “advantage” for the banker? At best, a loan will be repaid according to the terms and conditions set out in the loan agreement, with additional interest at whatever rate the market allows. Furthermore, within the banking industry, there is a great obligation to thwart risk. After all, it’s not the “bank’s money” that’s being sluggish, it’s the depositors’ money, which has been placed under the bank’s care for safekeeping. Therefore, if we are borrowing money, we want banks to be “easy”; if we’re depositing our money, we want it all back, and we want interest too (sound familiar?). Venture capitalists, by contrast, might enjoy a better advantage as they can demand a “piece of the action” if the business takes off. Whether or not that will happen, however, is still a great gamble, not unlike betting on horses at a racetrack (as some have suggested).
Right stage, enter: Credit cards
The vast majority of companies are formed by entrepreneurs who use some form of start-up as a means to mitigate their need for start-up capital (or due to limited access to traditional forms of capital). Bootstrappers have been known to use a variety of techniques, including bartering, drop shipping, sharing space, placement in austere facilities (including homes, which has become a major trend in its own right), bargaining, and trading. do-it-yourself methods. for accomplishing just about anything related to launching or running their respective businesses. These company founders have raised money by mortgaging homes, using severance and retirement packages, negotiating payment terms, “paying Peter with Paul’s money” (for example, juggling internal cash flow), using personal savings, borrowing from friends and relatives, and using personal money. as well as commercial credit cards.
According to a report from the Small Business Administration (SBA) Advocacy Office, 71 percent of small businesses obtained credit from non-traditional sources, primarily homeowner loans and credit cards. Another report published in american banker He cited industry research commissioned by MasterCard, which found that nearly two-thirds (64 percent) of small business owners use “plastic for business expenses.” Defense Office Senior Economist Charles Ou was quoted as saying that in the category of loans $100,000 or less (known as micro-business loans), the increasing use of credit cards may account for nearly all of the growth in that category. . It should also be noted that women-owned small businesses, as well as minority-owned and Hispanic-owned businesses, tend to rely on credit cards as the most used type of credit.
Pros and cons
Credit cards are one competitive option among others that may be available to someone starting a business. Abstinence is also a choice. If one does not have the means to start a business, perhaps one should refrain from doing so. The analysis is divided on the issue. On the one hand, the popular and business press has carried stories of entrepreneurs leveraging multiple credit cards to launch businesses that sometimes turn out to be very successful, despite detractors. Within the banking industry, small business credit card loans have become an attractive new market; this was possible thanks to new techniques that established a connection between personal solvency and the solvency of small businesses. On the other hand, bankruptcies have increased, companies continue to fail at very high rates, and the practice is risky, at best.