Regardless of what business you are in, there are times when money becomes tight. During those tough periods, you might be tempted to lean on easy sources of cash like credit cards to get you through.
I met a woman a few weeks ago who did just that during the 2008 financial crises. She was a smart person and first refinanced her home in order to keep her business afloat. But when things didn’t improve she started using plastic. Before she knew it, she ran up over $35,000 in credit card debt – debt she is still struggling to pay off to this day at rates in the high teens.
I understand that sometimes using credit cards to finance your business can be wise. But other times it can lead to disaster as it did for the lady I told you about. How do you know when it’s a good move and when it isn’t? In my opinion, if you ask yourself a few questions, the decision really isn’t that difficult.
A. How much money do I need?
Many times, people think they need a certain amount to keep their doors open but the real amount is much higher. That’s because if you are in a tough business climate, you may not know for sure when the dark clouds will pass. You may think you only need enough to get you even with current bills, but what about future expenses? If the business is doing poorly, you might need to borrow more now to have reserves if the rough patch continues longer than you anticipate.
The problem with underestimating your needs is that, if things don’t pick up, you may have to go back to lenders again for more – and they may not be so generous. If that’s the case, you could really end up in hot water. It’s better to plan for contingencies now rather than hope for the best and end up on the wrong end of an ugly surprise.
B. How long will I need it?
You have to apply this same logic with respect to how long you might need the cash. If you think you’ll repay the loan in 90 days but actually need it for 180 days (or longer) you may find yourself in a real pickle. Be conservative and give yourself enough leeway to maneuver if things don’t go the way you plan.
C. What is the least cost alternative?
While credit cards may be a very easy way to finance your business, it may not be the only way. I mentioned above that the woman I met first refinanced her home in order to free up cash. You may consider the same option. Outside of that, think about inviting friends and family to invest in your business. If your business really is viable and you can prove it, this move could be a win-win for all parties involved.
D. What happens if I don’t have the money to repay the loan in the scheduled time?
Think about the worst case and what would happen if you don’t have the cash to repay the credit card debt. Even if you get a great business credit card with a low initial rate, eventually the rate will skyrocket. If that happens, and you are unable to roll the debt to another card, you could be taken to the cleaners.
E. Are there any other alternatives to financing?
If your business is cash poor, it’s time to take a very serious look at what’s going on. Are the problems really just a function of short-term business conditions? Or is there a systemic defect that threatens the long-term profitability of your company? If so, it may be time to sell or just close your doors.
If you feel like the only way to keep your business open is to finance it with credit cards, please think it over again carefully. If the business is doing poorly and you can’t reasonably expect a positive change, it may be time to shut down rather than get into hock with credit card companies. Remember, if you artificially keep a dying business on the respirator, you could potentially build up personal debt and waste a great deal of time.
If on the other hand you have solid reasons for believing the current problems are just temporary, check out your reasoning with a few trusted business mentors. If they buy your logic, look into the least-cost/risk method to get your hands on the needed cash. If all else fails, short-term borrowing using credit cards can work – but please be mindful of the risks.
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