Giving Your Business a Charge? (12/7)

Giving Your Business a Charge?

More than ever, business owners are pulling out the plastic to finance their operations. According to a new study by Arthur Andersen's Enterprise Group and National Small Business United (NSBU), nearly half (47 percent) of small- and mid-sized business owners say they used credit cards to finance their businesses in the past 12 months, up from 34 percent in 1997.

That 13 percent jump means that credit cards are now the most-favored financing method among business owners. And the trend is expected to continue, with 43 percent of respondents saying that they intend to use credit cards to boost their businesses in the next 12 months.

Analysts fear that business owners using credit cards to spur growth may find themselves crunched with debt. Compared to just one year ago, the number of entrepreneurs who pay off their balances each month dropped by half, from 59 percent to 38 percent. Nearly one in five of respondents say they use two or three cards, and 5 percent say they use four or more cards.

"Relying on credit cards is a 'quick fix' for many small business owners - demonstrating their ingenuity in finding ways to help their businesses move ahead," says Todd McCracken, president of NSBU. "However, the high finance charges on credit cards ultimately can lead to the loss of capital that could otherwise be reinvested in their businesses. Small business owners need to reach a point of equilibrium where credit card usage is balanced with other financing methods."

In addition to credit cards, the business owners project that they will continue to rely on commercial bank loans and leasing as financing methods in the next 12 months. Commercial bank loans made a 7 percent jump in 2000 to 45 percent, reversing a steady decline over the previous five years. Leasing more than doubled, reaching 36 percent, and asset-based financing, or using inventory as collateral, tripled from 4 percent in 1997 to13 percent in 1998. Other popular forms of financing among the business owners include:

Vendor credit (17 percent)
Private loans (14 percent)
Personal/home equity loans (12 percent)
Selling/pledging accounts receivable (3 percent)
SBA guaranteed loans (2 percent)
Venture capital (1 percent)

"While the availability of financing for businesses is a positive sign, it is important to inject a note of caution," says John Evans, deputy director of Arthur Andersen's Enterprise Group. "Business owners need to be careful not to overextend their debt burden. They must carefully balance their ability to obtain financing with their capability to pay it back."