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Using credit cards and personal savings are risky ways to fund a small business startup, some financial advisers say. However, the majority of female entrepreneurs still choose plastic over traditional bank loans, according to a recent survey.
Researchers at PNC Financial Services Group surveyed nearly 1,300 women-owned businesses and found that 59 percent of female entrepreneurs used a business credit card to fund their business, and 44 percent used personal or family savings.
Some entrepreneurs said that credit cards gave them more flexibility and allowed them to get their businesses up and running faster. However, finance experts say the decision to rely on credit cards to fund a business could hurt their credit scores and put them deeper into debt.
“They think that they’re just going to use the card once or twice, but they use it a few more times than they think they will,” says Justin Krane, president of KraneFinancialSolutions.com.
Krane says he’s had female business owners with $5,000 to $20,000 in credit card debt come to him for financial advice, and he’s recommended they only use credit cards as bridge loans and set up their businesses more before resorting to a card.
However, Crystal Kendrick, who owns a marketing firm, says that her $35,000 credit card limit is essential to running her business and that bank loans aren’t possible for businesses like hers that don’t have collateral.
“If you have a service-based business, you often can’t get loans for cash advance capital,” says Kendrick, who has paid 24.99 percent interest to get cash advances from her business credit cards.
She estimates that half of the time she doesn’t pay off the balance of her credit cards every month and must pay the finance charge, which cuts her profits by 10 to 15 percent.
A business credit card and personal savings aren’t the only ways female entrepreneurs are funding their businesses, according to the PNC survey. A line of credit from a financial institution was used by 38 percent of respondents. 34 percent used a personal credit card, and 26 percent obtained a business loan.
Experts say that alternative sources of funding can sometimes be a better alternative than plastic. For example, a loan from family and friends can be structured with a very low interest rate and can be excluded from a gift tax if the entrepreneur pays only interest, notes Krane.
Credit cards with low introductory rates of 0 to 6 percent, in contrast, often rise to 10 to 18 percent after six months and can be hard to get back into control. “Once you start with a credit card and it gets out of control, it’s like the Titanic,” says Krane.
Still, some female entrepreneurs have managed to successfully use credit cards without getting into trouble. For example, online jewelry sale kit business owner Megan Andrus found a credit card with a zero percent interest rate for six months and found that to be enough time to pay off the $2,500 she borrowed to attend a trade show. Andrus has also used her credit card to pay for her inventory and website and pays her monthly $1,000 bill off in full each month.
“I’m pretty good about paying back my credit cards,” says Andrus, 29, who has four credit cards and has been using them for about 10 years. She’s more familiar with them than she is with bank loans, basically paying for everything with credit cards.
Using credit cards in her business has also helped Susan DiMezza rack up enough frequent flyer points through her credit cards that she has taken 10 trips since she started her website selling women’s accessories in 2008. DiMezza uses the credit card to pay for shipping and inventory and pays the bill off monthly.
“Why not get the benefits, if you can by using the card,” she says, “if you can pay off the balance each month?”
But if you can’t, beware, says Mike Arman of Integrity Financial in Florida. Businesses have ups and down, but the credit card bill always arrives on time and you can’t tell them you’ve had a slow month and expect some leniency, says Arman. Miss the payment or simply be late on it and your credit rating or credit limits could drop.
