This is the first in a 75-part series entitled “You might be an entrepreneur if…” that will add details to the list composed a year ago on another post entitled What it Means to Be an Entrepreneur. And so it begins…you might be an entrepreneur if you’ve maxed out more than $50K in credit cards to fund your business.
An entrepreneur has limitless optimism and is a risk taker. There’s no obstacle that can’t be overcome by a little more funding. After all, six months from now the money will be pouring in and paying off $50-60K in credit cards will be like paying the water bill. At least that’s what I thought.
My first business, Mindwire Interactive, received $41K in equity funding from friends and family. We never took out loans, and we never maxed out credit cards. We did have a lease on some computer equipment, and once I think we bought a sofa for the lobby on credit, but other than those instances we never incurred any debt. I can thank my partner at Mindwire for that. He was too risk adverse to put himself on the line for anything financially. I had given him more than 10% of the company and therefore I was required to have him sign any sort of loan, and since he wouldn’t sign, we never got any loans. At the time it was frustrating because we couldn’t finance anything, but in the long run it may have been the best thing since we ended up not having to deal with debt when we sold the company (Note: I do consider the $41K that was invested as debt and plan on paying that back someday with interest. I don’t feel that those who invested had the proper information they needed to make a wise investment.).
After selling Mindwire and starting MWI, I was on my own. I owned 100% of the company and could do as I pleased with regards to financing the business. The risk was all mine. I got an SBA loan for $100K to get things started. That money disappeared more quickly than planned. The company that bought out Mindwire was supposed to pay two months of rent on the building MWI had just occupied. This is because the lease was attached to Mindwire, but I agreed to get Mindwire off the lease and take full responsibility for it if the purchasing company (Avalon Digital) would pay for two months of rent. They didn’t, and there went $6K.
In order to sell Mindwire to Avalon we had to have no debt on the books when we sold, other than the computer equipment lease. But right before closing the deal we were short about $14K. My dad purchased $14K in receivables. The idea was then that Avalon would complete the work, the client would pay MWI, and MWI would pay back my dad. But for one reason or another Avalon never completed the work, the client never paid, and so I had to pay back my dad out of the loan money. There’s another $14K that was gone.
After moving into the new office space I was told that the builder had gone over budget on our buildout, and we owed $12K before we could move in.
Then Avalon stiffed me on the computer leases. They had the equipment but had never signed the lease transfer papers. I should have had them do it while we were signing the contracts to sell Mindwire to them, but I trusted them and I got burned. That ended up costing me $9K.
Within a few months $41K of the $100K I had was gone, which put something of a dent in my plans. I had employees, rent, and other bills to pay, and I didn’t have the money I thought I was going to have. Then I started getting all these offers for credit cards with no interest payments for a year. This seemed like the solution to the problem. I could get an interest free loan, pay it back within 12 months, and everything would be ok. Easy, right?
I wouldn’t say I spent with reckless abandon, but there were plenty of things we really needed. I’m sure some of them wouldn’t have seemed so necessary if we didn’t have the credit available. Computers, software, stock photography, etc. Anything we could purchase on the cards went on the cards. Within a few months I had racked up almost $60K on personal credit cards due to business expenses. It wasn’t hard at all. And as you can guess, 12 months later I hadn’t paid any of those cards off at all. Then instead of just making minimum payments we started making minimum payments plus interest. At 18% (one of our cards actually ended up charging us over 30% interest at one point) how much do you pay in interest per year on $60K? $11,737.09 to be exact. Almost $1,000 per month.
And here’s the kicker, I had no way to pay it off. I was barely making payroll, rent, and other bills, so whenever the month rolled around it was all we could to make the minimum payments. I went to banks to try to get a debt consolidation loan so I could pay off the credit cards and get a reasonable interest rate around 10%, but guess what? Banks don’t lend money to you when you’ve got $60K on credit cards because your credit is in the toilet. I tried to explain to them that if they loaned the money to me to pay off the credit cards then my credit would be better, but they would just shrug and in essence say “Your cause is just but I can do nothing to help you.” I learned that ALL banks are run on formulas, and no matter how much a human being at a bank might want to help you they’re bound by those formulas.
After almost two years of paying the outrageous interest I was bailed out by someone who loaned me enough to pay off the cards, after which my credit rating shot up, I was able to get a loan, and I paid back the person who loaned me the money.
What’s the lesson? Credit cards are for convenience, that is, a replacement for carrying cash and checks or buying things online where you can’t use check or cash. They make it easy to track purchases. They can be used selectively to smooth out cash flow. But they should not be used in place of a loan. If you need a loan, go get a loan. If you can’t get a loan, do without or get creative about how to get what you need. If you feel you absolutely must use a credit card to finance your business, best of luck to you. I hope you don’t end up in my situation.