Are Credit Cards Replacing Bank Loans for Small Business Financing?

As small businesses find it harder to borrow money for starting a business or expanding an existing business, more companies are turning to credit cards for financing. As I mentioned a while back, some companies are using trade credit for financing, and often this involves getting a credit card from a supplier (like an office supply company).

A recent Business Week article notes that the number of small businesses using credit cards for financing is increasing. That's pretty scary, considerisng the cost of credit these days. (The first example in the Business Week article was a 30 percent interest rate. Yikes!) If a small business is forced into bankruptcy, the credit card company gets nothing, so they make sure they get their money on the front end by charging extremely high interest rates. They also love to change their rates and terms, with little or no notice. And they put penalties in small print. In one case, I missed a payment and they immediately increased my interest rate, saying I didn't comply with their "terms" (that was, assuming I could find the terms in the mass of small print).

I can tell you from personal experience that the credit card companies are aggressive, sending out requests on a continuing basis, asking if I would like to finance my small business with their card. If I took all their offers, I'd be awash in credit, but I certainly don't want to do that. How many business credit card offers do you receive every week?

If you are considering a credit card (or cards) to finance your business startup, do it cautiously. Only borrow what you really need. Consider the credit cards as temporary, and pay them off as fast as you can. Doing this may get you noticed favorably by a bank, which might then give you a business loan.

The Small Business Information GuideSite has a good list of tips on using credit cards for business startup. Proceed cautiously.