In my last post, I talked about funding your business with your retirement account. Now while that may at first seem crazy, there are some cases it can work but you must be careful. Other ways people have funded their business have involved using their personal credit cards. Yes, you might have heard amazing stories of entrepreneurs and filmmakers who did this and it worked out for them. That is a rare case. I know because about 8 years ago I did this and ended up with $80,000 in personal credit card debt that I almost couldn’t pay off.
When Things Are Good You Don’t Think Twice. But You Should More Than Ever.
Back in 2000 the stock market was roaring and Internet businesses were the bubble of the day. I had started my business in 1999 and we were doing product development and marketing for technology companies. We had tons of startups and a few big tech companies. The big companies paid well and on time while the startups tried the whole cash and stock thing (we did bite on a few and I will never do that again) so in general things were good. We grew to 15 people and then it happened. First with a “uh oh” 400 point “adjustment” on the NASDAQ in March 2000. It was the beginning of the tech bubble bursting but we didn’t know it yet. By the end of the year many of our startup clients were struggling to pay their bills and many collapsed. Still we had to meet payroll and keep the lights on. Since we were not yet two years old as a business I could not get a line of credit but I could sure get personal credit cards.
That is when I started down the slippery slope. I used my own credit cards.
Mid-way into 2001 I was using them on a revolving basis and while things were getting tight we able to get by with our larger clients who still needed to launch products, had cash flow and couldn’t hire the talent they wanted because people were still chasing dot-com dreams.
Then the bottom fell out…
On September 11, 2001 it was a beautiful morning. Crisp and cool fall air with not a cloud in sky in DC or New York. I was supposed to be in New York that day for the Risk Waters Financial Technology Congress on technology security at Windows on the World in the North Tower. I decided that day to sleep in and stay in Baltimore since some colleagues would be there later that day and I had other projects that needed attention. I drove into work not knowing what had happened and that day my entire staff and I walked to a corner bar to watch everything happen.
About a week after the attacks, most businesses and people were still in a state of shock. All of my clients, especially the larger ones, froze their contracts and payments. This caused a chain reaction with vendors like my company. Since we couldn’t get paid, we couldn’t pay our bills or our employees. Looking at the financials I realized we had about two months of cash flow left so I had to make a decision – keep going with a reduced staff and hope that things get back on track or stay the course and run off the cliff. I chose the former and talked with everyone very frankly together. We all decided we would finish what projects we had that month so the company could get paid eventually and give everyone severance for a month and time to find other jobs.
After Laying Everyone Off, I had $80,000 to pay off personally. Ouch.
Mixing up the credit cards with personal and business stuff was a nightmare for my accountant. After all that I still had $80,000 in personal credit card debit to pay off. Eventually, recievables did get paid and I was able to get things under control but I was lucky. I would never recommend this to any one unless you had a hold on a check for a few days and really had no other choice and even then I would wait a few days.
Use Them as a Tool, Not Financing
I agree with Jeremy Vohwinkle on About.com that “credit cards do have their place in business just as they do in personal finance. They are a convenient way to make purchases and potentially receive cash back or other rewards. What you have to realize is that you should treat a business credit card just like you would a personal card. Only charge what you can afford to pay back, keep interest rates low, and make payments on time.” So true.