Study finds many finance with own credit cards

By Rhonda Abrams
Gannett News Service

Have you pulled out your own credit card to pay your company's bills? If so, you're not alone. Personal credit cards are the No. 1 source of financing for small businesses, according to a new study by the Small Business Administration's office of advocacy.

If you're starting or running a business, you may hope to use "other people's money" to expand your company. Don't fool yourself: Your own money and your own credit cards are going to be the primary source of financing. Even a quarter of the largest businesses in the survey — those with 100 to 499 employees — used personal credit cards for financing.

And you're going to be in debt. The overwhelming majority of all small companies have some kind of debt. So, don't think you're the only one with all those payments due.

The study, "Financing Patterns of Small Firms," examined the borrowing habits and money sources of small businesses in 1998. When looking at survey results of "all small firms," keep in mind that this includes companies with as many as 499 employees. But I can tell you that a company with 100 or 300 employees will have a very different experience at a bank than a company with two or 12. (For the complete report, visit www.planningshop.com/sbareport).

The survey found:

• More than 80 percent of small businesses used some form of credit and had outstanding debt.

• 71 percent used credit cards or loans from the business owner.

• 55 percent had traditional loans from banks, credit unions or other traditional sources.

• 46 percent of all businesses used personal credit cards.

• 34 percent used business credit cards.

Don't think that personal credit cards were only used by the smallest small businesses. The highest percentage of personal credit card use was at companies with 10 to 19 employees, with 52.2 percent using personal cards to help finance their companies. Even 23.7 percent of businesses with 100 to 499 employees used personal credit cards.

And using the owner's money didn't stop there — 30 percent of all small corporations had loans from the business owner. And why not? I lend my business money. Should I only invest it in the stock market? Why should I believe other companies have a better chance of success than my own?

What types of businesses are most likely to get money from a traditional source, such as a bank or credit union? They are:

• Mining and construction — 66.8 percent

• Wholesale trade — 64.3 percent

• Transportation — 62.1 percent

• Finance, insurance and real estate — 59.8 percent

• Manufacturing — 58.5 percent

• Retail trade — 54.1 percent

• Services — 48.8 percent

One surprising finding: I would have suspected that loans from friends and family would have been highest among the smallest businesses. They're not. Businesses with 20 to 99 employees got the most financial help from their inner circle. In fact, sole proprietors had the lowest percentage of loans from family and friends.

So, what does this all mean for someone looking for money for his or her own business?

• Be prepared to use your own credit. Clean up your credit rating before you start a business, and stay on top of your credit card payments.

• Keep track of the money you put in your company. Write up loans with yourself.

• Develop a relationship with a good business bank while your business is still small. But expect that relationship to pay off — in terms of credit — as your business gets larger.

Rhonda Abrams is the author of "The Successful Business Plan: Secrets & Strategies" and the president of The Planning Shop, publisher of books and tools for business planning.