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Home arrow News arrow Bahamas and Intl Articles arrow Financing your Business with Credit Cards
Financing your Business with Credit Cards PDF Print E-mail
Written by Admin   
Saturday, 04 November 2006

As many students return home from college or graduate College of the Bahamas, they face a tough job market. Many try to strike out on their own with small businesses for pocket money until they can get a regular job. 

The biggest challenge is funding of any type of venture. One source of funding your new venture are credit cards. In the following paragraphs I’ll explain with references to an article I read in Entrepreneur.com regarding starting a business using a credit card for funds.


American surveys of entrepreneurs show that credit cards are among the most popular sources of startup financing. A survey institute found that loans from relatives and borrowing against credit cards were the two most common financing techniques used by startups with less than five employees. Despite this high rate of usage, the terms of credit-card financing are poorly understood.

Image Most Bahamians are leery of getting into credit card debt, and for good reason. Bahamian Banks like Scotia and Royal Bank of Canada charge very high interest rates and fees and using it to fund your business when you are not guaranteed any income at all in the early months can leave you up to your neck in debt fast! You have signed a personal guarantee for a credit card for the first time. Since the vast majority of businesses in the Bahamas are sole proprietorships, the difference between personal credit and business credit is murky from a bank's perspective. Unless your business is incorporated, you're the de facto guarantor of all business debts. So if your business has a slow sales quarter (or more commonly no sales) and you fall behind on your credit-card payments, your personal credit rating and your personal ability to borrow are at risk.

Even if your business is incorporated, your bank or credit-card issuer may still require you to guarantee the business line of credit. In practice, most banks require shareholders with significant ownership in corporations to guarantee business lines of credit--typically owners with more than a 25-percent stake are required to sign guarantee forms when credit lines are more than $5,000. Moreover, most guarantee forms require joint and several liabilities, implying that all guarantors are responsible for the whole amount of the debt, even if they're not full owners of the business.

If you're attracting new partners to your business, be sure to include a provision in the partnership agreement that commits them to accept a personal guarantee on all existing business debt. The goal is to spread the liability as widely as possible to reduce the risk to any one individual.

For small businesses struggling to find funding, borrowing against a credit card can be an attractive--if not the only--option. Plunging further into credit-card debt is a scary proposition, but for many the outcome has been rewarding. If you feel using a credit card to fund all or part of your business is the best option for you. Understanding the risks before you accept the offer can save you a lot of financial pain in the future.
Last Updated ( Sunday, 27 July 2008 )
 
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