The hardest thing about starting a business is usually finding capital. Many VCs, bankers, and others will tell you to start with friends, family, and credit cards. But Startup Journal has some warnings about the credit card route.
Ten years ago, Jason Olim and his twin brother, Matthew, took a gamble and racked up $64,000 in credit-card debt to expand their business: an online music retailer called CDnow. The Olims paid off the debt quickly, took the company public, and later sold it to Bertelsmann AG, the German media giant, for $117 million.
Sam and Ren�e Beckley also ran up thousands of dollars in credit-card debt to start their own business, a recording studio in Aurora, Ill. But they aren’t quite millionaires yet. Although their business is growing, they’re so mired in bills that they signed on with a debt-consolidation firm earlier this year. Between the debt and a hefty hospital bill, they expect it will take four years to pay off the $40,000 they owe.
These are the potential risks and rewards for entrepreneurs who lean heavily on credit cards when starting up a business. Plastic can be useful for people who can’t get loans from banks or family, or who are sitting on a can’t-miss idea and just need some help getting over one big hump. But owners of less explosive businesses can get bogged down quickly in debt, especially if a missed or late payment prompts the card company to ratchet up interest rates. And even though entrepreneurs can open up card accounts in their business’s name, they are usually personally liable for bad debt.