Should Entrepreneurs Minimize Credit Card Debt? | Hacker News Reader

Should Entrepreneurs Minimize Credit Card Debt?

boss.blogs.nytimes.com

13 pointsedw51931 comments

The answer as with all questions that have not enough qualification is: "It depends.".

If you need to finance something short term and you have a fairly good idea when you'll be able to pay off then the answer is probably yes, unless you can borrow it cheaper somewhere else.

If you need credit cards to bootstrap your business then you need to very carefully work the cost of borrowing into your financial model. If you do that you are more likely than not going to find that it is better to find an outside investor who gets a piece of the action than to use credit cards.

Think of it as an absolute last resort when you're in a pinch and it's fold or take a chance on the card, or for very short term financing where you'll pay off the debt very shortly after you start to incur interest.

Any other uses are going to be trouble. And the penultimate example really is a hail mary pass, chances are if it gets that far that you'd be better of folding rather than to end up folding any way but with a bunch of extra debt that you can not get out of.

i once talked to two guys who had bootstrapped a successful test prep company. i asked them how they'd funded the startup. they opened a drawer, pulled out two fistfuls of credit cards each, grinned, and said "these are our investors".

i laughed, but thought those guys were nuts. there are much better and far less-risky ways to bootstrap.

So much for the credit card companies keeping tabs on how much they are exposed. If everybody would do a trick like that it I'm sure it would implode VISA or MC in a heartbeat.

Nice trick though. Did you ask them how they managed to get that many cards ?

What kind of an interest did they end up paying on the total amount of money the borrowed that way ? (in other words, what was their eventual cost of their financing strategy ?)

> Did you ask them how they managed to get that many cards ?

Can't be too terribly hard. I get three credit card applications in the mail a day. I've known friends in college that had five credit cards, mostly maxed out.

http://app-o-rama.com/

My roommate did this and got a large line of one year 0% interest credit, which he immediately maxed out on 4.5% one year CDs. Free money.

"Large line of one year 0% interest credit." Where's the sense in that for the CC company?

edit: It seems that some work is required and there are some costly pitfalls, so the game won't be played by many. Thus losses will be small.

People use CREDIT CARDS to fund companies???

The U.S. of A is a strange, strange country.

Anywhere else, this would be both impossible and something no sane person would even consider.

It's actually a lot better than using credit cards to fund consumer purchases...

With a startup, there is at least a small chance that you'll make back your money. With an IPod, and blu-ray DVD, and the latest clothes, and various other consumer knick-knacks, it's basically guaranteed that money is down the drain.

When I started a company in Canada I did not have a bank presence there, had to hire about 10 people in the first 60 days, rent an office, furnish it get a house and so on.

I took a credit card with me that was backed by a dutch account, went to 'Royal Bank' and asked to open an account. They asked how much I was going to fund the account with and produced the card.

No credit score, nothing. They asked, ok, how much. A six figure credit card advance later my account was open and we got bounced up several floors to a personal account maanger.

That's one way in which you could use a credit card to fund a business, but the credit line on the card was secured by an account abroad, so it wasn't borrowed money like in the example above.

Funny look on the face of the clerk :)

Didn't you lose several thousand dollars on the exchange rate when you pulled money across via your credit card? I know when I use my Canadian credit card abroad, Mastercard converts at a rate 1-2% worse than what I can get elsewhere.

Yes there was some cost involved, but because we knew exactly what we were going to do the account in nl was already in $CAN. We also had a US dollar account because most of our income was from the US (24x7 advertising).

I think the total on about 90K Canadian dollars spent came to a few hundred bucks, not exactly free, but compared to what the wire costs, delays and so on would have been I figure the time saved more than made up for that.

the account in nl was already in $CAN

Aha, that solves that problem. I didn't realize that you could get CAD bank accounts and credit cards outside of Canada.

The banking system here allows you to open accounts in many different currencies, my bank (RaboBank) offers quite a variety of foreign currency accounts, but so do most other big banks here, though there are not many of those. In nl, currently you basically have a choice between 5 major banks but only three of those are internationally active (Rabo, ABN-Amro and ING).

I'm always pretty wary of using foreign currency accounts though, my costs are in Euros and if I take a risk on the exchange rate then that can hurt pretty badly.

All my income is - unfortunately - in USD, the current exchange rates are low enough that I lose sleep over it.

The last 10 years have not been kind to the American dollar, to put it mildly.

Most banks actually offer accounts in a broad range of currencies to attract the real money, which is asset management of middle-sized fortunes, usually including some international diversification.

No.

EDIT: Yes.

Sorry, I inverted the logical value of the headline in my head. Also, I've used credit cards to start a company and my advice to you is: don't do it.

I can imagine some scenarios where a credit card could be useful to bridge a gap once profitability is already established. However in general using a credit card to fund a startup in any way is just plain stupid.

If you need money you don't have you should either find an angel or get a job and start saving. If you run a balance on a credit card you are getting ripped off plain and simple. If you put a balance up on a credit card for a business you better have a sure thing on your hands--and not a sure thing based on entrepreneurial optimism--I mean you have paying customers and are cash flow positive. Otherwise you are just making a short term bet that's going to cripple your long-term freedom in exchange for a 2-6 month shot at something. And how often do we succeed in the first 2-6 months?

" However in general using a credit card to fund anything in any way is just plain stupid."

Fixed that for you. You shouldn't buy ANYTHING with money you don't have! No wonder so many people are in debt!

What about mortgages?

Personally, I don't believe in mortgages, though obviously sometimes they're the only reasonable choice. I obviously overgeneralised for emphasis - there are times when it makes sense to borrow, the point is, though, that borrowing money should be the exception, not the standard thing to do anytime you don't have money for something you want. If its not urgent, its far better to save up and buy than to buy and pay pack.

Absolutely. I've never ever borrowed anything other than my mortgage. Of course living in a country with a well-subsidised higher education system makes that not too hard :-)

Debt is not bad. Unmanageable debt is bad.

Does your cashflow cover the interest payment? Is your cashflow showing an upwards trend so that you'll be able to pay up your debts? If yes - credit card debt or any other kind of debt is not bad. It'll help you grow faster. Without losing a lot of control.

That's not true.

If your cashflow is showing an upwards trend so that you'll be paying up your debts you are still doing worse the moment any of your predictions about your future income stream do not work out. Now you have two problems, on the one hand you have a problem in your business that needs your attention, on the other you have the credit card companies that are after your skin.

Debt is fine as long as the going is good, when the going gets tough it becomes a real headache quite fast.

Smart money management tip: keep a buffer in place. Stay one month ahead of the interest payments.

So even if something goes wrong with your business - you have at least 30 days (and usually 45-50 days) before having payment issues.

Your ROI is highly unlikely to exceed the interest rate on the card.

If you run a venture that has exponential growth potential - then your ROI is usually likely to exceed the interest rate with ease.

My entire family is into diamonds. So I know a bit about how the diamond trade works. Every trader takes loans and usually the interest rate is 1 to 1.5% per month. Very similar to credit card rates. Everyone pays them without a lot of issues - because the ROI is there.

I know its the same with a lot of small to mid textile firms too.

Sure, if you trade goods (and keep inventories low), then you can use short-term loans (incl. credit cards) to finance purchase of inventory until re-sale.

However, if you're building a business predicated on service delivery, the cycle is quite different and lead time is likely to exceed the "free month" with a credit card. Business loans make more sense.

The only sane use for credit cards is to increase your credit score and for emergencies.

Use them as much as possible and pay off your balance, on time, every month. period. I set each one up to automatically pay off the balance every month. Watch your credit score go through the roof.

Emergencies are when you need to spend money you don't PHYSICALLY have. You've got it in the bank and you'll pay it off at the end of the month, just like always.

The only other reason I could accept would be if I didn't have the money, but I had a signed purchase order (or something similar), guaranteeing that I will be able to pay off the balance as usual.

If you know what your earning power is and know that you could comfortably pay of the debt in 6 months I don't see the problem.

A good hackers 6 month savings applied to him living a scrappy bootstrapped lifestyle could give a year of living on CC debt.

I can't think of a single reason to pay credit card level interest. If you get free interest for a limited period and manage that extremely well, I suppose that's a cool trick. Any other use is a fools game.

Currently I save more money by overpaying my mortgage than I would get in any type of savings product available to me.

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