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I am about to state something that I should never have to say out loud: It is a bad idea to max out your credit cards when funding a startup. If you don't know it is going to work, you are risking far too much in the process. You really should give some thought to this before ever doing it.
It is defintely a good thing that Scott Kitun, CEO of Technori, didn't know me when he maxed out $65k in credit cards so he could invest in his new company. If Scott had known me, I would have let him know what I just told you: it is just too much risk. Get a job and do your side hustle until it is generating revenue. The credit card debt is a bad idea and could lead to disaster.
Pros and Cons of Funding a Business With Credit Card Debt
Credit cards are a very popular funding source for new businesses. I've already said I think this is a bad idea, but let's look at how it can be done.
Like anything else, you have to examine the pros and cons to make an informed decision.
It Is Easy
If you already possess a credit card with the available credit you need, you are all set. Credit is immediately available without any work on your end. This is the ultimate in easy! If you don't have a business credit card yet, get one so you can keep your personal and businesses finances separate.
Revolving Credit is Convenient
Credit cards are considered revolving credit. What does this mean? You can borrow up to your credit card limit and then pay off the balance–or at least pay it down–and then borrow again. As long as you make payments on time and your balance is under your limit, your account will be in good standing. The best part is there is no need to reapply each time like you would with a business loan.
You Keep Your Equity
When you approach funding in this manner, you keep the equity in your business. You have no need to offer shares to attract investors. When you finance your business with credit cards, you keep your full ownership position.
Potentially More Competitive Rates
If you have a low-interest rate card, your rate might be lower than rates charged for standard business loans. If you are lucky enough to find and qualify for a 0% time-limited introductory offer credit card, you will be in even better shape!
If so, you can finance your business without being charged interest for many months–sometimes as long as a year. Make sure to read the fine print of these special offers very carefully!
You Could Be Rewarded
Does your credit card offer rewards points? If so and you use it to fund your startup, you will rack up major rewards! If you want to use a business card instead of a loan, check out the rewards programs that are available.
No Need for Collateral
When you use credit cards for financing there is no need for collateral. With a new business, finding collateral can be very difficult.
Track Expenses Easily
If you use a business card to fund your business, everything you buy is tracked. This will simplify bookkeeping later.
Establish Good Business Credit
By using business cards, you establish business credit. You can later use that card to apply for other business loans that offer lower rates.
There are most definitely cons that must be considered.
If credit cards are the main source of financing and your business fails, who is held responsible for all the charges?
Credit cards usually require a personal guarantee, which means your credit card company can come after you for the entire balance. You will have exposed your personal assets when they attempt to collect the debt. Everything from your house to personal savings accounts, even your children's college funds–it is all fair game in the collection process.
When you use a personal credit card to finance your new business it can lead to a tangled mess of transactions. There is little to no distinction between business and personal finances and that's a very bad thing.
Relatively Low Limits
When you use just credit cards to fund your business, you are limited.
Even if you manage to find one of the special offers mentioned previously, what rate do you pay when that offer ends? Credit cards are not the cheapest way to finance a startup.
Low rates may have you paying under 13%, many cards are closer to 20%. That's an expensive burden when you first start your business. If you have good credit and a solid business plan, a business loan might be cheaper.
Kitun's vision involved a new way to launch and fund startups, but he didn't have the liquid capital to do so. What can you do when you don't have the money to do something you want to do? How about start a podcast?
Kitun had no access to investors, so he decided to create a podcast that would bring the investors to him. This is a very non-traditional approach. The approach worked, as he was able to turn debt and no connections into a very successful podcast and funding for his new business.
Here's how he was actually able to perform that and how you can too:
He started a new podcast using an established brand.
By starting the podcast under an established brand, it was much easier to speak with influential individuals.
There is genius here that you may be missing. By using the recognized brand, WGN Radio, he was able to interview and meet some very successful people. He literally had no access to these people outside the podcast.
Nobody says no to appearing on a podcast, especially if that podcast is already well known. That's not entirely true–it should say “almost nobody”. What would you say if someone asked you to appear on a podcast or a radio station…would you respond with no? I say that unless you already get a lot of free media coverage, most people are going to agree to the appearance with no hesitation at all. It just makes sense. The exposure is amazing because the audience of the show is into the things you are into.
At one point Kitun had a guest on who turned out to be a very important individual. This individual would wind up funding Kitun's company. You might call that luck, but I refer to it as a very patient, well defined networking strategy that paid off!
Using the interview to ask for financial backing
Kitun knew he had very little time to make his investment (via credit card debt) work, so he spent time creating a list of very successful founders and investors. He paid careful attention to those he thought would be a good fit for the business he was building. He then invited them to be on his show.
Mike Rothman is the founder of SMS Assist. He was one of the guests on Kitun's show. After the interview, it didn't take Kitun long to realize that Rothman was the perfect fit for his new business venture.
Kitun pointed out that he tipped his hand after the interview. Apparently, Rothman asked him how much it would cost to do his business idea at scale. When Kitun told him it would cost one million dollars, Rothman didn't even flinch.
Rothman decided to invest that million dollars in Kitun's company.
This is very important to remember. Never wait around for anything. Don't wait for a pay raise to come to you. Don't ask for permission to ask for the sale. Put yourself out there.
Kitun is a great example for everyone. When you have the investor's time and attention, ask for what you need. This is how you will achieve what you want.
Previous connections help secure the interviews
In Kitun's case, he put in years of work meeting and helping other people and asking for nothing in return. He did this years before he had the idea for his new business. The point being that it was not being done in order to secure investments.
The long term strategy used by Kitun worked. By the time he reached out to Rothman, someone he had helped in the past agreed to get in touch with Rothman to set up the initial meeting. That contact played an instrumental role in Rothman funding the company.
There is most definitely a lesson for all of us in this situation. It is never too late to start building connections and social equity that can be used to further your goals and dreams. It is true, the later you start, the harder it is to get where you want to go, but get to work on it! The eventual pay off is going to make it more than worth the effort you put in.
I've spent 3 years building a business. It is only recently that it is growing at an exponential rate. I do what I do because I believe 100% in it. When I need help, I have a group of people I can reach out to. My network helps me accomplish what I need.
For me, podcasting is already a business. However, I also use podcasts to help grow some of my other businesses. The brand new Small Biz Advocate show is aimed at making business connections and then possibly helping them with my business advocacy non-profit. It becomes a win win situation–I make connections and I then help their business grow.