At some point, all small business owners will be faced with

a big decision: How should I finance my company’s growth? A recent survey shows

that more and more small business owners are turning to credit cards as their

primary source to finance their company’s working capital and expansion needs.

Is this approach to financing a viable alternative to traditional finance

sources?

Below are different types of financing sources available to

the small business owner (in order of popularity) and the pros and cons of

each:

Credit cards

“Teaser” introductory rates and the onslaught of credit card

offers in the mail have made credit cards a convenient, no-questions-asked

financing option for many small businesses. As a quick fix for temporary cash

flow woes or as a vehicle for long-term growth, entrepreneurs are using their

credit cards in record numbers.

Advantages:

• Easy

  to obtain.

• Access

  to cash is immediate.

• Lenders

  do not question how you will spend funds.

• Minimal

  paperwork.

Disadvantages:

• Expensive

  (rates range from 14 percent to 22 percent).

• Interest

  may not be deductible.

• Too

  many cards may be a red flag when trying to get a bank loan later.

• Usually

  leaves the owner personally liable.

• Easy

  to get in over your head.

Commercial bank loan

This is what most of us think of when we think of business

financing. Building a relationship with a bank is essential to the long-term

goals of most businesses. It’s wise to ask your professional advisers

(accountant, attorney, and financial planner) for an introduction to a banker.

Advantages:

• Establishes

  a relationship for future financing needs.

Disadvantages:

• Harder

  to qualify.

• Financial

  statements (and possibly a business plan) will be required.

Commercial Finance Companies

Commercial finance companies such as the Money Store can be

a good alternative for the small business owner who is having trouble getting a

traditional bank loan. These companies specialize in loans usually

collateralized by a company’s existing assets.

Advantages:

• Easier

  to qualify for than a traditional bank loan.

• Many

  will work with those with past credit problems.

• Some

  companies specialize in niche markets.

• Can

  be more aggressive and creative than banks in arranging financial

  packages.

Disadvantages:

• Interest

  rates usually are higher than traditional bank loans.

• May

  require more stringent reporting procedures to keep an eye on your

  business (and their investment).

Home-equity loan

If you are a small business owner who is “house-rich” but

cash-poor, taking out a home equity loan to keep your business afloat may be

very tempting. But what may seem like the most logical decision may be a fatal

one. Before risking your home to finance your business’ daily operations, be

realistic about the future of your business. If you may lose your business in

the near future, don’t risk losing your home in the process.

Advantages:

• Interest

  is generally deductible (on debt up to $100,000).

• Easier

  to qualify for than a traditional business loan.

• Lenders

  do not question how you will spend the funds.

Disadvantages:

• Home

  is at risk if you default.

• Easily-accessible

  equity may cause an owner to keep financing a “sinking ship.”

• Closing

  fees and points may be costly.

Factoring accounts receivable

If your business has substantial accounts receivable,

factoring may be a viable financing option. Factoring companies can provide a

fast and hassle-free source of operating capital by purchasing a company’s

accounts receivable at a discount of their face value. The ability to stabilize

your company’s cash flow is another benefit.

Advantages:

Access to cash is almost immediate.

• Minimal

  paperwork is required.

Disadvantages:

• May be

  too expensive to use on a regular basis.

• Doesn’t

  apply to all types of businesses (must have stable accounts receivable).

Venture capital:

You should only consider venture capital financing if you intend

to grow your business. Venture capitalists are savvy investors who expect a

quick return on their investment (given the risk factor) and require a

short-term exit strategy. Depending on your company’s stage of development and

its plans for the future, you would get your funding from one of the following

three major venture capital sources: a professionally managed venture capital

fund; an angel investor offering; or an investment banker-sponsored private

placement

Advantages:

• Experienced

  management may be placed to help guide the business.

• Association

  with a reputable venture capital firm creates credibility.

• Personal

  liability is reduced.

Disadvantages:

Investors usually want a large percentage of profits and

equity.

• Will

  hold owners accountable for projections not met.

• Owners

  may lose control of the day-to-day operation of business.

If you want to grow your business and your financing needs

are fairly modest ($25,000 to $1 million), an “angel” investor may be your best

bet. These investors are usually successful entrepreneurs who would like to

help other like-minded entrepreneurs succeed. Check out the Small Business

Administration’s ACE-Net (Angel Capital Electronic Network) Web site at

www.sba.gov/advo for angel listings.

If, after you’ve carefully examined your choices, it still

seems that using a credit card is the best financing option for your company,

here are a few tips to make the most of this no-frills (but risky) source of

financing:

Do your homework. Interest rates on credit cards vary

widely, so it pays to do your homework to find cards that will provide you with

the lowest interest financing costs. Visit the BankRate Monitor

(www.bankrate.com) to see a comprehensive listing of current rates. There are

still many low introductory offers available so take advantage of these low

rates when you can.

Pay off your balance each month. This simple strategy will

help reduce the risk that you will get crushed by credit card debt, which may

eventually cost you your business.

If you don’t use it, lose it. A stack of unused credit cards

may work against you when are in the position to obtain a traditional bank

loan. Banks look at the unused credit lines as potential instant debt. If you

don’t use a credit card, cancel the account. You can always get another one if

you need it.

Article provided by Schultz, Chaipel & Co.