Small business owners, or prospective small business owners have limited sources of financing when they first start out. Bank lenders have such stringent lending criteria that they often will not lend the amount needed by the entrepreneur to fund their startup. Even corporate finance companies will hesitate to loan money to start-ups as the risk for failure is high and the new company has no tangible assets that a loan can be secured against. One of the easiest sources of financing a new business is credit cards. There are many stories of entrepreneurs who have funded their start-ups on credit cards. The credit cards are easy to get (applications are frequently sent in the mail) and plentiful through a number of different financial institutions. And frequent spending on these cards will even cause the credit card companies to increase the spending limits on their cards! Of course, credit cards are a very dangerous financing tool if spending gets out of control and the holder cannot pay his or her debts off in a timely manner. New credit cards offers usually carry a low introductory rate, but 6 months later a much higher rate of interest can kick it making the borrowed money extremely expensive. Regardless of this danger however, there have been numerous entrepreneurs who have started out their small businesses financing operations with their credit cards. Most of these people would then switch to more conventional financing options (ie banks) once they had a proven cash flow. But in the start-up phase, credit cards can prove to be an instrumental option for financing a new business when other sources of money are very tight. |
