

Should Entrepreneurs Minimize Credit Card Debt? - edw519
http://boss.blogs.nytimes.com/2009/09/01/should-entrepreneurs-minimize-credit-card-debt/?WT.mc_id=BU-D-I-NYT-MOD-MOD-M113-ROS-0909-HDR&WT.mc_ev=click

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jacquesm
The answer as with all questions that have not enough qualification is: "It
depends.".

If you need to finance something short term and you have a fairly good idea
when you'll be able to pay off then the answer is probably yes, unless you can
borrow it cheaper somewhere else.

If you need credit cards to bootstrap your business then you need to very
carefully work the cost of borrowing into your financial model. If you do that
you are more likely than not going to find that it is better to find an
outside investor who gets a piece of the action than to use credit cards.

Think of it as an absolute last resort when you're in a pinch and it's fold or
take a chance on the card, or for very short term financing where you'll pay
off the debt very shortly after you start to incur interest.

Any other uses are going to be trouble. And the penultimate example really is
a hail mary pass, chances are if it gets that far that you'd be better of
folding rather than to end up folding any way but with a bunch of extra debt
that you can not get out of.

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kareemm
i once talked to two guys who had bootstrapped a successful test prep company.
i asked them how they'd funded the startup. they opened a drawer, pulled out
two fistfuls of credit cards _each_ , grinned, and said "these are our
investors".

i laughed, but thought those guys were nuts. there are much better and far
less-risky ways to bootstrap.

~~~
jacquesm
So much for the credit card companies keeping tabs on how much they are
exposed. If everybody would do a trick like that it I'm sure it would implode
VISA or MC in a heartbeat.

Nice trick though. Did you ask them how they managed to get that many cards ?

What kind of an interest did they end up paying on the total amount of money
the borrowed that way ? (in other words, what was their eventual cost of their
financing strategy ?)

~~~
fallentimes
<http://app-o-rama.com/>

~~~
kingkongrevenge
My roommate did this and got a large line of one year 0% interest credit,
which he immediately maxed out on 4.5% one year CDs. Free money.

~~~
Ras_
"Large line of one year 0% interest credit." Where's the sense in that for the
CC company?

edit: It seems that some work is required and there are some costly pitfalls,
so the game won't be played by many. Thus losses will be small.

------
brazzy
People use CREDIT CARDS to fund companies???

The U.S. of A is a strange, strange country.

Anywhere else, this would be both impossible and something no sane person
would even consider.

~~~
jacquesm
When I started a company in Canada I did not have a bank presence there, had
to hire about 10 people in the first 60 days, rent an office, furnish it get a
house and so on.

I took a credit card with me that was backed by a dutch account, went to
'Royal Bank' and asked to open an account. They asked how much I was going to
fund the account with and produced the card.

No credit score, nothing. They asked, ok, how much. A six figure credit card
advance later my account was open and we got bounced up several floors to a
personal account maanger.

That's one way in which you could use a credit card to fund a business, but
the credit line on the card was secured by an account abroad, so it wasn't
borrowed money like in the example above.

Funny look on the face of the clerk :)

~~~
cperciva
Didn't you lose several thousand dollars on the exchange rate when you pulled
money across via your credit card? I know when I use my Canadian credit card
abroad, Mastercard converts at a rate 1-2% worse than what I can get
elsewhere.

~~~
jacquesm
Yes there was some cost involved, but because we knew exactly what we were
going to do the account in nl was already in $CAN. We also had a US dollar
account because most of our income was from the US (24x7 advertising).

I think the total on about 90K Canadian dollars spent came to a few hundred
bucks, not exactly free, but compared to what the wire costs, delays and so on
would have been I figure the time saved more than made up for that.

~~~
cperciva
_the account in nl was already in $CAN_

Aha, that solves that problem. I didn't realize that you could get CAD bank
accounts and credit cards outside of Canada.

~~~
jacquesm
The banking system here allows you to open accounts in many different
currencies, my bank (RaboBank) offers quite a variety of foreign currency
accounts, but so do most other big banks here, though there are not many of
those. In nl, currently you basically have a choice between 5 major banks but
only three of those are internationally active (Rabo, ABN-Amro and ING).

I'm always pretty wary of using foreign currency accounts though, my costs are
in Euros and if I take a risk on the exchange rate then that can hurt pretty
badly.

All my income is - unfortunately - in USD, the current exchange rates are low
enough that I lose sleep over it.

The last 10 years have not been kind to the American dollar, to put it mildly.

------
herdrick
No.

EDIT: Yes.

Sorry, I inverted the logical value of the headline in my head. Also, I've
used credit cards to start a company and my advice to you is: don't do it.

------
ankeshk
Debt is not bad. Unmanageable debt is bad.

Does your cashflow cover the interest payment? Is your cashflow showing an
upwards trend so that you'll be able to pay up your debts? If yes - credit
card debt or any other kind of debt is not bad. It'll help you grow faster.
Without losing a lot of control.

~~~
jacquesm
That's not true.

If your cashflow is showing an upwards trend so that you'll be paying up your
debts you are still doing worse the moment any of your predictions about your
future income stream do not work out. Now you have two problems, on the one
hand you have a problem in your business that needs your attention, on the
other you have the credit card companies that are after your skin.

Debt is fine as long as the going is good, when the going gets tough it
becomes a real headache quite fast.

~~~
ankeshk
Smart money management tip: keep a buffer in place. Stay one month ahead of
the interest payments.

So even if something goes wrong with your business - you have at least 30 days
(and usually 45-50 days) before having payment issues.

------
dasil003
I can imagine some scenarios where a credit card could be useful to bridge a
gap once profitability is already established. However in general using a
credit card to fund a startup in any way is just plain stupid.

If you need money you don't have you should either find an angel or get a job
and start saving. If you run a balance on a credit card you are getting ripped
off plain and simple. If you put a balance up on a credit card for a business
you better have a sure thing on your hands--and not a sure thing based on
entrepreneurial optimism--I mean you have paying customers and are cash flow
positive. Otherwise you are just making a short term bet that's going to
cripple your long-term freedom in exchange for a 2-6 month shot at something.
And how often do we succeed in the first 2-6 months?

~~~
dkersten
" However in general using a credit card to fund _anything_ in any way is just
plain stupid."

Fixed that for you. You shouldn't buy ANYTHING with money you don't have! No
wonder so many people are in debt!

~~~
wlievens
What about mortgages?

~~~
dkersten
Personally, I don't believe in mortgages, though obviously sometimes they're
the only reasonable choice. I obviously overgeneralised for emphasis - there
are times when it makes sense to borrow, the point is, though, that borrowing
money should be the exception, not the standard thing to do anytime you don't
have money for something you want. If its not urgent, its far better to save
up and buy than to buy and pay pack.

~~~
wlievens
Absolutely. I've never ever borrowed anything other than my mortgage. Of
course living in a country with a well-subsidised higher education system
makes that not too hard :-)

------
flooha
The only sane use for credit cards is to increase your credit score and for
emergencies.

Use them as much as possible and pay off your balance, on time, every month.
period. I set each one up to automatically pay off the balance every month.
Watch your credit score go through the roof.

Emergencies are when you need to spend money you don't PHYSICALLY have. You've
got it in the bank and you'll pay it off at the end of the month, just like
always.

The only other reason I could accept would be if I didn't have the money, but
I had a signed purchase order (or something similar), guaranteeing that I will
be able to pay off the balance as usual.

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immad
If you know what your earning power is and know that you could comfortably pay
of the debt in 6 months I don't see the problem.

A good hackers 6 month savings applied to him living a scrappy bootstrapped
lifestyle could give a year of living on CC debt.

------
jhancock
I can't think of a single reason to pay credit card level interest. If you get
free interest for a limited period and manage that extremely well, I suppose
that's a cool trick. Any other use is a fools game.

------
iuguy
Currently I save more money by overpaying my mortgage than I would get in any
type of savings product available to me.

