It’s true. The banks aren’t lending to startups.
Banks were already nervous to lend to startups and small businesses before 2008. And then 2008 happened…
So how is it, then, that entrepreneurs nationwide are finding the capital to flip houses, launch an app, open a coffee shop, buy a franchise, and more?
A common misperception is that these entrepreneurs are rich, have rich family members, or saved up cash. Truth is, a great many entrepreneurs begin with little or nothing – starting right out of college, relaunching after a bankruptcy, driving a clunker, skipping meals to have money for rent, etc.
And yet, every day smart entrepreneurs get funding. They find a way. They’re entrepreneurs.
Most smart entrepreneurs get funding using alternative methods of personal and business funding. Sometimes they find investors, but most of the time, entrepreneurs are too possessive of their business idea to sell equity in their business. The primary method that these entrepreneurs fund their startup would surprise you.
Unbeknownst to many, smart entrepreneurs get funding using different personal loan options, namely through the use of credit cards.
“The average American has 4.4 credit relationships, with a total open credit limit of almost $27,000. These credit relationships include any type of debt or credit, including mortgages, auto loans, student loans, home equity loans, credit cards and personal loans. The average small-business owner has almost twice as many credit relationships, at 7.4, with open credit limits averaging more than $56,000” (Yahoo Finance).
It is growing more and more difficult to find an entrepreneur not using credit card lending in some form or another to advance their business.
But we’re not talking about one or two credit cards max-ed out at $7,000 each. It is a growing trend to see smart entrepreneurs fund their business with as much as $300,000 in credit card loans.
How is this possible and how is it smart?
That is a great question.
The answer is not as simple as entrepreneurs applying for and using a handful of credit cards. It’s not the “what” (credit cards), but the “how.”
So how are these smart entrepreneurs getting funding through credit cards?
The answer is two-fold: they only target certain credit cards and then they leverage that credit card account to build a long-term relationship with that bank.
Credit Cards are Unsecured Lines of Credit
Saying the words “credit card” often unleashes a storm of anxiety in the minds of frugal business-folk. In truth, credit cards are merely unsecured lines of credit. These particular lines of credit are made more convenient, which is why they are so easy to abuse for consumerist purposes.
But for business purposes, credit cards are wildly flexible and can be processed seamlessly through any merchant account (that is, swiping at the store). Any entrepreneur can use his/her credit card to buy supplies, pay for services, buy vehicles, and even pay full franchise fees.
But what about cash?
Credit card companies make balance transfer options easy enough to liquidate into a cash bank account. Many credit cards come with balance transfer checks in the mail. Smart entrepreneurs can write checks out to their business checking account for payroll and cash expenses.
Here are the steps that smart entrepreneurs take to secure business funding through credit card loans:
- They take great pains to get their credit score above 700 with all three bureaus. Computer software reads credit card applications and automatically approves applicants with high credit scores (above 675) and great balance-to-limit ratios (any existing credit card debt is paid down under 30%-50% of the credit limit). If collections ever appear, they get them removed immediately.
- They don’t apply for a card unless it carries a 0% introductory rate for purchases or balance transfers. Typically, smart entrepreneurs look for credit card lines being interest free anywhere from 9-24 months.
- They apply for more than one card at the same time. Hard inquiries begin to lower your credit score once your credit report refreshes every 3 weeks or so. Putting a couple hard inquiries on your report is not visible to other lenders right away. Smart entrepreneurs know that they can take a few hard inquiries within a week or two period without it negatively affect their funding goals.
- They get co-signers to replace their own low credit scores or bring in more funding. A group of business partners can individually bring in $10k-$15k each through credit card loans on 0% introductory interest rates.
- For lending in the amount of $30,000 or greater, they hire experts in unsecured lending programs for small business to help them acquire large amount of credit lines at once. Experts at unsecured lending can help smart entrepreneurs acquire anywhere from $45,000-$125,000 per applicant/partner at 0% introductory interest rates. Multiple partners utilize these programs to acquire over $250,000 in unsecured financing.
When it comes to credit card loans for business, it is all about strategy and exploiting the flexibility of credit cards toward the long-term investment of building a business. Most importantly, smart entrepreneurs get funding through personal and business credit cards to build the business up in its first 2 years. After 2-3 years into the business, smart entrepreneurs can move away from these credit card loans and toward more traditional loans through their already established lending relationships (but most actually prefer not to move away from the credit cards).
“Yet the greater access to credit, higher balances and larger obligations each month do not translate into difficulty managing that credit. The average credit score of small-business owners is 721, almost 50 points higher than the average American’s score, indicating that small-business owners are both taking full advantage of the credit available to them and using it responsibly” (Yahoo Finance).
This brings me to the most important part of business financing through credit cards.
Credit Cards are Smart Entrepreneurs’ “Foot in the Door” with the Best Business Lenders
9 out of 10 lenders with the best interest rates will be FDIC-insured banks – national banks, regional banks, federal credit unions, military banks, etc. Smart entrepreneurs know that they cannot walk into any of these banks and ask for a business loan for their startup. But these same entrepreneurs will swim leisurely in sizable revolving lines of credit (as in the hundred thousands) at interest rates well below 10% within 2-3 years of operating the business. How do they accomplish this?
The answer again: credit cards.
Banks do lend, but they are risk averse. When you build a long-term relationship (particularly a lending relationship) with a bank, you nurture “good feelings” with that bank so that they are more likely to lend to your business in the future.
Here are the steps that smart entrepreneurs take to leverage their credit card loans and build long-term lending relationships with the banks:
- They negotiate fees and credit limits. Smart entrepreneurs call their bank every 6 months to ask for credit line increases and a lower interest rate. This may seem like an over-bearing thing to do, but the banks actually like it. Calling the bank to negotiate terms is perfectly normal and indicates to that bank that you are a shrewd, active client. All the banks care about is your ability to make your payments on time.
- They never use the cash advance option. Banks pile fees and soaring interest rates on cash advances. Some banks may close an account for taking a cash advance. Smart entrepreneurs get funding into cash through balance transfer methods – never through cash advance.
- They set their monthly payments on auto-pay, and make 2-3 additional payments per month as they have ability. Computer software reads your credit card activity, and when the software sees multiple payments made per month, your reputation with that bank grows. Setting up auto-pay insures that you never miss a payment since missing a credit card payment is the surest way to sour relations with that bank.
- They do everything they can to get all credit card balances below 50% of the credit card limit as soon as possible. This isn’t always possible, but when they can, smart entrepreneurs know that by keeping their balances under 50% of the credit limit, they are eligible for new credit card promotions and credit line increases.
- They prepare their business for worst-case scenario. Smart entrepreneurs do everything they can to eliminate chances for unexpected costs. They get business insurance, hire a bookkeeper/CPA, and utilize payroll services to insure that they do not get hit with fines or law suits. Having these risk management tools in place helps them continue nurturing positive relations with the banks they pay each month.
- They take additional steps to improve their cash flow. Smart entrepreneurs get each bank to move the credit card payment due date to the same day at the best possible day of the month. Doing this helps the business maintain a minimum checking account balance that is attractive to the banks. Smart entrepreneurs also set up a merchant services account in order to accept credit cards from customers (you want to make it convenient for customers to do business with you).
- They keep great financial records. Smart entrepreneurs know that in order to capitalize on their bank relationships, they need to be able to show clean financial statements proving the business’ profitability. Ideally, after 2 years your business should have the financials to get most banks to seriously consider offering you a more attractive loan option at better interest rates.
- They invest time and money into inbound marketing techniques. Every entrepreneur must get out and sell themselves (outbound or direct marketing), but only the smart entrepreneurs take it a step further to pour resources into referral power and inbound customer traffic. HubSpot has done a great job helping entrepreneurs develop a mentality that is customer-focused. In inbound marketing, you force yourself to spend time getting to know your customer, attracting them into relevant conversation, closing their business, and then continuing to woo them with excellent customer service. Inbound techniques also keep the entrepreneur from burning out before the business becomes profitable.
Smart Entrepreneurs Get Funding by Being Tenacious
Entrepreneurs make many mistakes before becoming “smart” entrepreneurs. One thing is common to all entrepreneurs: they take journeys that most are unwilling to take, and they persist through inconvenience and failure. Thankfully, we don’t always have to make mistakes ourselves to learn.
We can learn from the savvy business owners – the ones who work the system in a way that is neither shady nor expected. In spite of how nervous banks are to lend to businesses these days, they have made it easier for business owners to launch their business through credit card financing. It’s happening all the time, and entrepreneurs are getting smarter about it.
If you are looking to fund your business in this manner and find yourself nervous at the prospect, consider discussing these fears with a specialist at Coda so that we can help you minimize risk while acquiring the best funding options to launch your business. Fear of the unknown will make the truth more unfriendly than it ought to be.