You may be getting number of letters in the mail, email offers and referrals to companies who can find financing for your business by bringing you access to a variety of credit cards. For example, let’s say you need $50,000, they’ll get you 5 credit cards with $10,000 limits. So far so good.
It gets even better… 0% interest for a year (+/-)! The fee for lining up these lines of credit is usually about 5% of the total credit limit of all the cards combined. (Terms and conditions will vary! They always do.) Sure, you can go out and get some of these cards on your own, but what these brokers offer is access to more cards than you might imagine (ex: Hawaiian Airlines?!?) and they can often get them for your business so they won’t affect your personal credit.
So, if you need $50,000 – $150,000 quickly, this may be your answer. (The broker’s fee will go onto one or a few of your new cards immediately.) Just know that when the promotional term is up you will then be in normal credit card territory where the interest rate is around 15-19%.
No worries! You think, “I’ll pay these off before then and this will be a great deal! “ And all will be well in your world. But we know you better than that don’t we?
If you use the cash advance feature of these cards, the transfer fee will usually be 3%. Still, 3% of $XXX onto a card with 0% for a year or more is still a good deal. Often purchases carry a much lower interest rate that cash advances so see if your vendors will accept credit cards (most will). However, it’s only fair that they may charge you there merchant processing fee. (ex. Paypal is 2.9%) So do your own math on these deals.
Here’s where this game gets interesting (or dangerous?!?)
When you use your cards to pay vendors, use all of them evenly. You may be tempted to put a big charge on one or two cards and save the others for later, or perhaps use several cards and save one or two for special future occasions or projects.
Here’s what’s going to happen…
Sooner or later, the card issuing company with little usage on their card(s) – the one(s) you’re saving for later – will have their computer system (artificial intelligence(?) / AI) scan the universe for your credit card usage, your credit history, etc., across all platforms, databases, credit reporting firms, etc. (I don’t know how this really works, but…) and if your/their card has a high, not yet used credit limit, they may/will collapse your credit line to a fraction of what you were hoping to enjoy in the future. For example, an $8,500 limit on a card you were saving for the future suddenly gets reduced to $2,000! Poof! There went $6,500 of available credit you thought you had. To add insult to injury, you’ve paid 5% initially just to get it! ($325) Ugh!
Down the road, when you pay them off (well, pay them down a bit perhaps), it’s important to also pay them evenly. You may be tempted to pay off the one with the highest interest rate. It’s the highest ROI. If your other cards have high usage (>50%) and the paid-off credit card issuer’s system scans your credit usages across all channels, you may be at risk of having that paid-down card’s limit reduced just like in the example above.
Remember, if you’ve run up a credit balance and it’s still there in a year when the 0% promotional rate ends, you’re looking at some fairly high interest rate financing. And, if you’ve run them [all] up to their limits, your FICO score may suffer.
“It will cost more and take longer…”
Perhaps you’ve gathered by now that I’m speaking from direct personal experience, with additional background and feedback from friends and clients!
Remember to budget for your project to cost more (maybe much more) than you anticipate – especially if it’s a technical project requiring additional tweaks and fixes to get it right. Make sure your project can be completed to a stage where you can offer it for sale. (That may be your MVP / Minimum Viable Product”) Allow for a marketing budget and perhaps production of a demo video… Everything that gets you to where you can start generating revenue. It’s no good to run out of cash and still have nothing you can sell!
Merchant Cash Advance loans?
I wasn’t going to get into these, but they seem close enough to credit card financing to beg the question. The idea is that they loan you money (up to your monthly revenue) at a set interest rate. Then you pay it back bit by bit every day directly from your merchant (credit cards acceptance) account. This seems like a crappy deal, but I haven’t done the proper math on them… Typically, we borrow money and pay interest on the outstanding balance. Once a month compounds enough, but if you pay it back a little every day, you’re not getting the full use of the money.
I watched a webinar by a guy pitching us to fund his merchant cash advance business. So here’s what it looks like from behind the scenes. He gave an example of needing to buy a $50,000 truck… I borrow $50,000 from my merchant cash advance with a preset 50% interest rate (Not a typo: 50%! It was presented as a “Rate Factor” of 1.5) to be paid back in 6 months. That means I pay back $75,000 within 6 months out of my daily credit card intake. Are you sitting down? That’s 50% in 6 months! Not a year!
Heroin is a better deal?!?
That’s like making about 5-years worth of payments in just 6 months! (If you need a truck that badly, I’m sure you can find a dealer who, even if they screw you really hard, will give you financing you can actually afford.)
OK, if you have the math and can refute me on this, please share in the comments. I’m curious. Until then, I’m going with, “this is the shittiest deal ever!” These seem very dangerous and we do not recommend them. Our policy is to avoid these at all costs and pay them off.
Bottom line, credit card financing can be a good deal, if you keep a close watch on it and manage all of your cards carefully!
I hope this helps with your business thinking, planning, and funding!
Fortunately for me, I use my own product: BizPlanBuilder to do the math on my own business.
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