How to Fail in Business : Early, Costly Debt Can Hinder Success of Start-Up Firms
Credit cards may be a tempting way to begin a business, but they’re not necessarily the smartest method.
“We caution people about using credit cards,” said Sandy Sutton, director of the Small Business Administration’s district office in Santa Ana. “What people are really betting on is money in the future.
“We advise people to try to find a cash source to start their businesses,” Sutton said. Friends and family are good sources, she adds.
According to the SBA, more than half of all one-person businesses get started with less than $5,000, usually money the owner saved or borrowed from relatives.
More important, aspiring entrepreneurs should try to find a couple of major customers before they even consider running up credit card expenses, she said. Sometimes customers will pay in advance for their orders, which could provide some start-up financing.
Other ways to stretch resources when starting a business are to borrow equipment and to ask vendors to extend payment schedules.
But the biggest key to keeping out of bankruptcy is to keep costs low at the beginning.
One mistake that people make, when starting businesses in their homes, is spending money up front to give themselves a more businesslike appearance, Sutton said. “They pay for an answering service instead of using an answering machine or buy fancy office furniture to project a successful image to potential clients and customers.”
But that’s how they get in trouble. “The more you can hold your expenses down, the better off you are,” she said.
The reality of the marketplace is that credit is tight, she said. “There is no real easy money that people are going to hand you.”
Although the Small Business Administration has a guaranteed loan program, such loans are not designed for brand-new, start-up companies. Most companies need a track record of at least three years, and the average size of an SBA loan is $300,000, Sutton said. “It’s meant for rapidly expanding companies that are cash poor.”
