Everyone Spends But Nobody Pays

In yet another shot across the bow of our economy figures released Friday indicate Americans put $2.2 trillion in debt on their credit cards in 2007.   This roughly equates to $7,000 per citizen in the entire country.  The number is both staggering and alarming.

 Overall the rate of increase has been over 325% since 1989 when credit cards first began to be heavily marketed on college campuses nationwide.  According to Cardtrack.com we are currently at a three year high in delinquent credit card payments.  

 This poses interesting questions to the small business owners looking to finance their businesses.  With changes in the Fico scoring model coming in 2008 it is widely predicted that heavy utilization will more severely effect scores than in previous years.   Looking ahead to May it would be wise for small business owners to begin planning for this change and to actively pay down debts as April approaches.  You may ask why April?   Because most credit cards report on the statement date – if the changes take effect in May you want your April balances to be below 50% so you are not overly penalized.

 Small business owners also probably want to take a closer look at pure business credit cards.   These cards are either totally guaranteed by the business or personally guaranteed by the owner.  The advantage being many of these cards do not report balances to your personal credit report and do not appear at all unless you become late.  The advantage here is true separation of business and personal debts which should be a goal of any business person.   Capital One is one of several banks offering these products.   Look for cards with low introductory rates, low or no annual fees and the ability to pay online.  Read the fine print to make sure you won’t be penalized too harshly for late payments or missed payments.

Throughout the web you will see references to SBA loans as another possible funding alternative.   The general consensus is good luck getting a loan from the government.   Despite all the claims to the contrary these loans are often very difficult to obtain and will end up requiring just as much collateral as a traditional loan.  Many readers have reported that the premise of “no or low collateral” is a total myth.  Most SBA participants will want you to put a lien on your home and if you don’t have a home they won’t lend you money.   The entire point of the SBA was once to provide loans to small business owners that did not have access to traditional funding sources.   It appears that over the last ten years this has all changed and it is now almost if not more difficult to get an SBA loan.   The program offers great promise but with most small business owners already having leveraged themselves to start their businesses it’s unlikely they’ll qualify.  In the process they’ll take several more hits to their credit report in the form of inquiries.

 We’ll elaborate more on the financing options available in the coming days.   In the meantime be mindful that Fico08 is coming.