Personal Credit May Now Be the Answer for New Startups

Personal Credit May Now Be the Answer for New Startups

Thursday, November 05,2009 06:45 AM

Despite all the talk of venture capital, angel investors, business loans and the like, the fact is about one-third of startup funding comes from credit cards. Plastic is the most popular source of outside financing to get businesses off the ground.

So it's important for startups to consider the effects of the federal Credit Card Act of 2009, even though the bill did not apply to small-business credit cards. The new regulations on consumer credit will have profound effects on how entrepreneurs finance their startups.

Entrepreneurs have come to rely on the ease of transferring balances between credit cards--and have come to view the fees associated with carrying balances as part of the cost of doing business. But this is an expensive way to finance: Interest rates and fees have historically run annual percentage rates up to over 30 percent. Just do the math: To break even on financing costs of 30 percent annually, your business needs to grow its cash flow or net income at 30 percent annually on a sustainable basis. That's a tall order for most businesses.

As a result of the Credit Card Act, credit companies are mailing bills earlier (21 days before the due date rather than 14 days, as required before). In addition, notifications of changes to fees, penalties and terms must be sent in advance, rather than retroactively (giving consumers the ability to opt out before the change takes effect). The rest of the new rules are set to go into effect in February, including regulations on interest-rate increases and disclosure rules that more clearly spell out the cost of financing using credit cards.

The Federal Reserve is next required to complete a study on small business financing--potentially to prepare for legislation for corporate cards issued to limited liability companies.

But until then, entrepreneurs should take maximum advantage of the new protections for consumer cards.

Read the rest at http://www.entrepreneur.com/magazine/entrepreneur/2009/november/203788.html