Pulled Under by Plastic
Friday, July 4, 2008
When Andrew Uribe started building his salsa-making venture, he, like many entrepreneurs, turned to plastic for start-up money.
But the business didn't take off as quickly as he had hoped. Now the Ellicott City entrepreneur has three credit cards that carry a combined $30,000, is behind on his bank loan and has moved out of the industrial space he had leased. Working out of a commercial space in Baltimore's Lexington Market that friends let him use on weekends, he has the capacity to pack only 1,600 jars of salsa a month instead of 14,000.
His minimum credit card payments run $325 a month, about 15 percent of his total monthly expenses, which he says mainly covers just his interest payments.
"It's horrible because any small profits that I am making, I'm using them to pay the credit cards," the maker of Emy's Salsa Aji said over the phone from New York, where he was meeting with potential investors. "It's hurry up and pay, and swim or sink."
Entrepreneurs have long used credit cards as quick financing. But with the sputtering economy, tightening credit market and cards' notoriously changing terms, more small business owners are struggling to pay their debt, accumulated on personal as well as small-business credit cards.
As credit standards loosened at the beginning of the decade, banks expanded their small-business credit card offerings. Compared with the consumer credit card market, the small-business market was virtually untapped and potentially lucrative, because business credit card use tends to be high volume and paid in full at the end of the month.
The result was a boom: Small businesses will charge 2 1/2 times more this year than they did in 2002, when credit card charges ran about $140 billion, according to estimates from TowerGroup, a financial service research and advisory firm.
But as the economy slowed, so did payments. Major small-business credit card issuers reported a sharp increase in late payments and bad debt over the past year. Advanta -- one of the largest issuers of small-business credit card debt -- wrote off $16.3 million, or 6.5 percent, of their small-business credit card receivables, up from 3.05 percent for the first quarter of 2007. Last year, Bank of America wrote off 5.57 percent of its domestic small-business portfolio, compared with 3 percent in 2006, with a disproportionate percentage related to credit card loans.
And the debt can last long after the business has failed.
Two years after starting Music America Records in Los Angeles, Jeremy Riney -- still a college student -- knew the record label was going under. He had financed his business with personal credit cards, and he owed about $100,000. When he missed a payment on one, his interest rates jumped from 0 percent to about 30 percent.
"The business was going nowhere, so the only thing I could fund the business with was more credit cards," Riney said. "I just started panicking."
He learned his lesson. He didn't borrow a dime to start his newest venture -- music search engine Project Playlist -- and earned enough to pay off his old debt within months.