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Small business owners turn to plastic to meet their capital needs - credit cards - Special Report: Small Business

Stacy Kravetz

Determined to start or keep going no matter what the cost, an increasing number of small and mid-sized Los Angeles-area businesses have turned to credit cards as a way of meeting their capital needs.

Small and mid-sized businesses, and most notably start-ups, have had a difficul time obtaining more traditional methods of financing and have taken more desperate measures, according to recent surveys conducted by the downtown Los Angeles office of accounting firm Arthur Andersen & Co. and National Small Business United, a Washington, D.C.-based private non-profit association representing some 65,000 small business owners. This is especially true of businesses in the West and most notably in California, where the recession has just begun to ease up in recent months, the surveys showed.

Though small to mid-sized Southern California businesses feel less concern abou recessionary challenges to their survival, many are still finding it difficult to obtain bank loans, according to a 1994 survey of small and mid-sized businesses in Southern California by Arthur Andersen's downtown L.A. office.

So now, more than in previous years, these companies are obtaining credit cards as a means of bringing capital to fledgling ventures.

Nationally, 26 percent of small to mid-sized businesses used credit cards to finance expansions or initial start-ups during the past 12 months, up from 16 percent in the prior 12-month period, according to a national survey of 747 businesses jointly conducted by Arthur Andersen's Enterprise Group and National Small Business United.

In the West, small to mid-sized businesses topped the national average, with 39 percent of businesses using credit cards to meet their capital needs, according to the national survey. This was due in part to the large number of entrepreneurs in California and the state's sluggishness in pulling out of the recession, said Craig Isom, partner in the Enterprise Group at Arthur Anderson.

"In this tough recession, companies were resorting to all measures to survive, even stop-gap or emergency financing," he said.

For companies in the West, reinvesting earnings was still the most popular method of financing, with credit card financing following second, ahead of bank loans, private loans, and vendor credit.

For Ron Rahav, sole proprietor of Ergon Consulting, an engineering and computer consulting firm in Los Angeles, credit cards are a way to take out a loan without having to create a business plan required by most lending institutions.

"Right now my time is better spent earning money than applying to banks for a loan," he said.

Because his income varies from month to month, Rahav uses cash advances on his six personal credit cards to make up for outstanding receivables. Some of Rahav's cards have low interest rates or special reduced-rate offers at certain times.

"If there's a limited-time deal, I shuffle my balance between cards until the special interest rate expires," he said.

Credit card financing can provide funds quickly for start-up companies, which have a harder time obtaining bank loans until they have established reputations and good earnings records, small business consultants said. Start-ups face sort of a Catch-22 of bank loan financing: When they're just starting out, lacking credibility with little or no business earnings to reinvest, any kind financing is scarce, they said. Later, when the business is on its feet with a solid balance sheet, bank loans are easier to obtain, but so is any other kind of financing.

Thus, when they're just starting out, the majority of start-ups have difficulty obtaining all the capital they need. This makes credit cards, some of which offer annual interest rates as low as 9 percent, an increasingly viable option, small business consultants said and survey results confirmed. Usually these are introductory rates which will go up significantly after a year.

Of those businesses in existence for three years or less, 47 percent used credi cards to meet their capital needs, as compared to 17 percent for businesses tha are at least sixteen years old, according to the survey.

One advantage to credit card financing is that it can be an immediate cash infusion based mainly on personal credit history, small business consultants said. By combining cards which offer immediate lines of credit for as much as $7,500 on Visa or Mastercard, small business owners can circumvent cash flow problems and amass necessary equipment quickly, they said.

When engineer Rahav wanted to move into consulting, he used his credit cards to purchase the computer equipment and software he needed.

On the downside, however, the interest accruing on credit card debt can eat up profits if the balances aren't paid down quickly, small business consultants said. Another problem with credit card financing is that businesses don't establish the kinds of lasting credit relationships they do with banks, they said.

"Businesses need to work the banks and other credit sources; they need to spend the time on building these relationships," said Isom, describing why a cash infusion through credit cards is at best a one-time solution.

Taking on credit card debt is not limited to start-ups, however, and some businesses that have been around awhile have use credit cards to keep the ship from going under, said Isom. However, these still tend to be the smaller, newer businesses, which have fewer other financing options.

COPYRIGHT 1994 CBJ, L.P.
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