While attending a The Boston Business Expo this week I was asked to give an interview with MSNBC and give some advice to other entrepreneurs just starting off their businesses. I chose to talk about creative financing for small business.
If you ask most successful entrepreneurs how they financed their business in the early days, most will say Visa, MasterCard an American Express. It’s hard to walk into a bank and get a loan if you aren’t already transacting business. A wish and a hope don’t get you much.
So if you’re going to finance your business off credit cards anyway, at least be smart about it. So many people get in over their heads because they don’t have a plan for paying down credit. Here’s a method of financing that we had used many times in the past.
How could a $10,000 unsecured, 1 year, pre-approved loan at 0% APR change your business?
If you were to instantly throw 10k at marketing and advertising, would you see a 2 or 3 fold increase in revenue over the next few months? If so then this approach may be just what you need but you must proceed with caution.
If you have good credit then credit cards will continuously up your personal limit and send you these credit checks with outrageous deals, like 0% or 1% APR for a year. That’s a sweet deal right? But you must to play by the rules or you’ll get burnt.
First of all, you need be absolutely confident that the use of the money will actually generate new business. Don’t get yourself in over your head. If you have a plan then cash that check and put it to use.
Now the credit cards want you to use this money but how do they make their money in doing so? The true answer is, they fully expect you to screw up. If you look at the fine print it will say that your interest rate will jump up to some ungodly number like 30% APR if you are so much as one day late with your payment. So, you just make sure that can never happen. Also if you don’t pay off the loan within the given special offer period the rate will jump up. Again they are banking on the fact that most people will blow it and go over the offer period.
The way to ensure you beat them at their own game it to calculate how many payments you will need to make to fully pay off the loan before the end of the period. And don’t pay just the minimum required payment, pay a bit more. Then set up automatic bill pay in your bank to pay the loan automatically every month. This way, you never have to worry about forgetting a payment and you can enjoy the benefits of a 0% APR loan.
One more thing to keep in mind. Do not do this if you are already carrying any balances on the credit card. Any payments you make will *ALWAYS* be applied to the promotional balance first (see the fine print). So if you take a year to pay down the 0% ARP loan you will still pay the high credit card rate on the original balance for the whole year. We learned this the hard way. So it's best to keep one credit card for purchases and one that you will use for promotional loans.
Our policy is that if unexpected money comes in we always use it to clean all debt off the books, even if it is at a super low rate. So be conservative, be cautious and use credit wisely to build your business.
