NPG On Huff Post This Week: Is The Credit Crunch Hurting Women Startups?
From this week’s New Power Girls series The Huffington Post, here’s what Meghan and Patricia have to say about the credit crunch and financing startups:
Meghan: The topic of financing for women entrepreneurs is a fascinating and provocative one. Historically women have had less access to traditional capital and in lower amounts than men. Traditional sources include bank loans, venture financing, investors et al. Because a lot of times we have to explore out of the box financing, many women have turned to credit cards with low interest rates to deal with startup costs, working capital and cash flow management. However, this can be a slippery slope. Many credit card companies offer low interest — with very, very fine print stating that the moment you are late on one payment, or start to max out your credit limit, or even your available credit according to a credit score — you will be summarily analyzed with an exponential interest rate raise. Often times in excess of 45 or 20 percent, which in effect amounts to usury — creating situations where you are in effect locked into a permanent state of debt because the interest is so high, minimum payments only keep you floating along, not able to pay principal. This can happen when unexpected financial circumstances occur, a vendor pays late. Suddenly your business model is forced to create revenue to merely satisfy minimum obligations on credit cards to avoid a bad credit rating and access to more financing should you need it. The credit rating agencies work carefully with the credit card companies and lobbying organizations to keep this system in place — and credit card companies consequently make millions and millions of dollars.
However — credit cards can most definitely come in handy — with rewards points and Air miles attached them they can be a savvy way to make larger purchases and reap the rewards points to offset ravel and other expenditures — but only if you have the revenue already booked and deposited. How do I know all this? Because when I started my business I thought I was being savvy, financing on a 2.1% credit card startup costs — when I missed a payment, my rate went up to 28% — and I am still paying that sucker off. It’s a painful lesson, but an important one. My advice would be to any entrepreneur, book revenues, have access to a credit card for emergency, but never use it as a sole source of financing, and only use it if you have the balance in the bank already. And in the meantime, if you want to learn more, this is an excellent special on PBS that ran a few years ago about credit card companies conspire with legislators and lobbyists to keep the system in place. There is also this organization about credit if needed.
Patricia: I’ve financed a business with a credit card as well as raised angel capital. Overall, I think both worked out okay. I think a lot of people rely on credit cards to cover startup expenses because they’re fairly easy to get, minimal hassle, etc., but they can pose serious issues. Credit is a business in itself — engagement should be cautious. I’m not sure how the credit card crunch will affect the growth of entrepreneurship, if it will. I do think that it’s going to force a lot of new ways to support businesses and new revenue models, etc., which in the long run might not be a bad thing. I also think a lot of entrepreneurs will turn to employment to cover their living expenses while they work and grow ideas. I hope that there’ll be an effort to support small companies currently affected by the credit crunch. We’re all contributing to the bottom line in the country and to keep that in place, everybody needs to be counted.
