Entrepreneurs (or Anybody Else): If You Must Use Credit Cards, Practice “Safe Swiping”

“But Everybody’s Doing It”

Are you familiar with that plea some children make in an attempt to get what they want based on the behavior of their peers: “But everybody’s doing it”? Should you, as a business founder or one who wants to be, use credit cards, just because a majority of your peers are using them? Ironically, the answer may lie in the same type of parental analysis that might be applied to a child’s situation. Are you mature enough to handle the freedoms and responsibilities that are associated with the behavior? Do you know what you are getting into?

Have you checked your credit card statements and account terms lately, and read the fine print? What those disclosures say, once they are translated into non-legalese, is that if you use the credit card account, you both understand and agree to the terms. Have you noticed default interest rates (if you miss making even a single payment on time) in excess of 30 percent? These default rates are not all that dissimilar to those of loan sharks, especially in light of the fact that they have emerged during a period of record lows relative to interest rates set by the Fed and corresponding prime interest rates (the most favorable rates granted to financially substantial commercial borrowers). Are you aware that bankruptcy laws have radically changed, and that it is not nearly as easy to walk away from credit card debt as it used to be?

Do you realize that complaints about credit cards have been ranked among the top four consumer complaint categories based on data from state and local consumer protection agencies (just behind automobile repairs and home improvement)? Have you used your favorite search engine and combined various words and phrases such as “credit cards,” “consumer complaints,” and “hate”? (Be prepared to wade through millions of hits.) It does not take much perusing to come across stories of woe written by consumers who have been tricked and trapped by credit card companies. You need to understand that some banks are engaging in predatory lending practices.

There are stories being told by people who signed up for a low rate for the “life of the balance” only to later receive a notice that in the fine print it was disclosed that the bank could change this rate based on factors such as credit ratings (and other criteria, at the sole whim of the institution). Many banks have sent these notices although their customers have not even missed a payment, which is clearly egregious. You’ll note that these are not “shady, off-the-wall” banks relative to the names that you will see mentioned—these are brand name banks engaging in shady business practices.

The banking industry constitutes a powerful lobbying force, which exercises considerable influence with lawmakers. History’s “haves” have always enslaved the “have nots,” economically, if not literally. Do not count on any help from your elected officials whose names appeared on ballots in the first place due to political contributions from the industry. According to an article in the <i>Washington Post</i> (Jim VandeHei, March 27, 2005; Page A01): “Credit card and banking companies, who are leading the lobbying effort, were top financers of Bush’s two campaigns. MBNA, Credit Suisse First Boston LLC, Bank of America Corp. and Wachovia Corp. were among the top 20 contributors to Bush.” (Shortly thereafter, sweeping changes to bankruptcy laws, favoring credit card companies and the banking industry, as referenced above, were passed by arguably, the banking industry’s, and not “your,” legislature.

If You Must Use Credit Cards, Practice “Safe Swiping”

If you do decide to use credit cards to start your business (or as a consumer in general), you must find ways to protect yourself from the risks involved. Practice “safe swiping” every time you slide that credit card of yours through a card reader and charge on your account. This is no different than safe sex, or anything else that might put you and your well-being at risk. It helps to establish certain rules to go by.

Rule number one: Don’t be in a hurry to start a business if you do not have the resources to do so in the first place. If everyone you talk to is skittish about your idea, you really need to question its viability in the first place. Turn over every rock looking for alternatives. Finding a backer, such as a supplier who wants you to succeed, or finding a customer who commits to purchasing and advances the money up front, would represent two such alternatives. Save money in your personal piggy bank and accumulate resources. Start out with a revenue source from some activity that feeds into a longer-term vision. For example, develop a part-time business into a full-time business over a period of time. Think small and manageable. Think of planting tiny seeds, and nurturing growth until it’s time to harvest.

Rule number two: Ask yourself how you are going to pay back what you borrow—collateralize your own loan if at all possible. Be willing to sell something such as a nicer car that you own for a more modest one, for instance. Be willing to sell all of your “stuff,” to the extent that is necessary to raise funds (preferably up front, prior to starting your business; if you sell when you are desperate and strapped for cash, you will be at a unique psychological disadvantage).

Rule number three: Consider whether or not you absolutely must have whatever you are purchasing on a credit card. If you are charging expenses such as payroll, ask yourself other questions, such as “do I need these employees?” What alternatives have you considered in lieu of paying cash for their services? Maybe you should make them partners to the business and arrange for them to invest with their own “sweat equity” contributions to the enterprise. Have you considered temporaries, interns, freelancers, outsourcing, or virtual assistants? Have you fully automated your business, for example, with Internet enabled ordering systems?

Rule number four: Manage your credit card debt with a vengeance. Pay your credit card bills on time and protect your credit in every way possible. Use an automatic payment service through your checking account provider, an online service, or the credit card companies themselves—don’t ever be late. Send two payments just to increase the odds that one will arrive by the due date. Send payments by certified mail, if need be. Do not accumulate balances if they can be avoided. Remember that just about every letter from a bank that starts by stating, “We value your business,” probably includes a change in terms; a change of terms is just about always in the bank’s best interest and not yours, with few exceptions, such as when it is the result of a legal settlement against the bank.

Rule number five: Watch your own margins. Credit cards started out as a convenience, such that one did not have to carry cash; they were used as a short-term pledge against cash that one had, and would pay back at the end of a billing period (e.g., monthly). They were not designed as a long-term source of capital. Because they are unsecured (although even this is changing), as a vehicle for financing they usually come with higher rates. By using credit cards unwisely, you are doing the exact opposite of what entrepreneurs must do: you are, in effect, buying (capital) at high prices, and selling your good or service under circumstances that reduce your own margins. That’s not a formula for being competitive in the long or short run. If you can’t raise the price, consider ways to add value so that customers would be willing to pay more. If you can’t do that, perhaps you should go back to the drawing board. You might have an unprofitable product or service on your hands.

The above rules take us all the way back to the basics of a viable business idea: do you have a product or service, for which you can demand an adequate price, and sell and deliver in sufficient volume, at a profit—after paying all necessary and ordinary business expenses? Bootstrapping a business startup to get it off the ground is to be admired when it works, but a lack of resources is one of the most cited reasons for business failure—so beware. It should be noted that many entrepreneurs cut themselves short and go without health benefits, insurance, training and self-development, adequate time off, and numerous other perks as well as necessities that foretell their ultimate demise. We all have ideas, and many of these ideas are quite clever. You don’t have to be a managerial “somebody” to have a great idea, either. (Corporations can sometimes act downright “dumb” in failing to harness the creative power of rank and file employees). Nevertheless, the pages of business history are strewn with the wreckage of otherwise visionary plans, gone awry.

Perhaps the most critical issue is whether or not you can enlist the support that you need in every context that is necessary to launch and operate your business. It’s a pretty good sign when you tell four friends about your idea and they all immediately pull out their check books. Are you truly prepared to start your business? You’d better be pretty sure of your answer before you take the entrepreneurial plunge, especially if you plan to fund your startup with credit cards.

Keywords: business startup, new business, credit cards, consumer complaints, bootstrapping, entrepreneurship