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However you fund business growth, don't do it on a card!

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17th Jun 2005
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In an article exclusively written for AccountingWEB, Nick Hood, senior London partner at Begbies Traynor, explains why so many owner-managers fall to the temptation of funding business ventures on their credit card

I suspect many others, also involved with business finance, winced like I did when reading Warwick Business School's recent report about UK owners of small and medium-sized enterprises spending an amazing £1.8 billion a month on their personal credit cards to help fund their ventures. We also learnt that it's business costs of all type, even items like vehicles and equipment, that these SME bosses are putting on their personal credit cards, not just travel or entertainment as you'd normally expect.

The reasons for this aren't hard to fathom. Dealing with business expenditure is so easy this way. With the credit card companies aggressively making credit freely available, getting a sizeable limit on a selection of cards is simple. Just about all adults are regularly invited to apply for new cards in unsolicited mail shots, and even on a trip to your local DIY store, people regularly encounter someone trying to persuade them to take out a new card who will even help them fill in the form. With such plentiful credit on offer, in just a few cards it's quite easy to have up to £50,000 of credit at your disposal.

Think how much harder it's likely to be getting that level of finance from your bank. All that inconvenience of having to write a business plan and then selling your business concept to a hard-nosed bank manager, who will no doubt ask you for a personal guarantee and possibly a charge over your property to back it up.

But we should all stand back and ask ourselves why getting an overdraft from a bank is difficult. The answer's simple ' banks like to assess risk and lend properly, so they need to put businesses through the financial wringer before they let people loose with their money. It may be irritating, but some sensible professional evaluation of a business can bring huge benefits, identifying issues the owner hasn't thought through and asking those awkward 'but what if' questions.

And if the banks want to lend responsibly, look at it from your own point of view: why would you want to borrow irresponsibly? Because that's exactly what using your personal credit card can be. The interest charges are much higher than at the bank. Keeping control of your levels of debt is more difficult, because extending your card's credit limit is usually fairly straightforward. And separating business and personal expenses can be a much more arduous process, making sorting out the accounting an unnecessary nightmare.

But worst of all, settling the debt is down to you personally. There is little point in operating through a limited liability company, as most people do, if you then expose yourself to personal ruin by loading up your own credit cards with business debt. Not only will the company go under, but the bailiffs will turn up on your doorstep as well.

My advice is not to substitute convenience for recklessness. If you do take a card for business purposes, budget in your cash flow for repaying the bill in full each month. This is the only reliable way of avoiding future financial trouble.

If it's impossible for the time being to break the credit card habit, be wise and regularly review your cards. Take advantage of the offers for interest-free periods and reduced APRs that still abound in this highly competitive sector. But be very careful, because holders who change cards too frequently are at risk of getting a poor credit rating, which makes borrowing in general more difficult. Enquire if your existing card issuer is prepared to offer better terms for loyalty. For obvious reasons these deals are not widely advertised, so you may have to be fairly direct in asking for one.

If, unfortunately, you have run up large debts on your cards on behalf of your business and are paying crippling interest charges, get advice immediately. It is better to consolidate your debts with a single lender, paying what will almost certainly be a lower rate of interest. But please keep very well away from the loan sharks still lurking in the depths of the credit pool.

For sources of larger funding, do speak to your bank or even to a business angel or venture capital firm. The Warwick Business School's research showed that only three per cent of companies ever consider getting equity finance. This is a crying shame, because it can offer the lowest funding costs and spreads the risk amongst more shareholders, not just the original owner manager. It also shows that your business is serious and is planning strategically for the longer term.

So if you can avoid it, don't use your plastic heavily for business. And if you are an owner manager with stressed out credit cards, don't delay in getting advice and dealing with the problem right away. Doing this is a very positive move and will immediately put your business on a stronger footing.

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