How Having Bad Credit Helped My Business

I’m all about disclosure, especially if it can be done in a way to be helpful to others, so a conversation on Twitter with a colleague sparked this post. They asked the simple question: “What business credit card do you prefer and why?” For many, not a loaded question, but for me a question with a complex answer. Then when Chris Brogan and I talked briefly about the new recession-inspired “thing” of walking away from debt (I am against, for what it’s worth – I think folks should face the music like grownups)… I knew it was time for this post.

All of my businesses are fully cash based, with no credit involved. This started because I was so careless with my personal credit when I was much younger and in school, and exacerbated later when I made some poor life choices in the romance department and I just didn’t have the credit to get a card or a line of business credit. It has continued as I’ve grown the businesses. As it turns out forcing myself to run and grow a business using only money I actually have forced me to be better at, well, running a business.

What I discovered starting out with no credit to turn to:

1) Having only the cash in the business account to turn to when planning events, attending conferences, paying freelancers, buying supplies and generally doing the day to day has taught me how to make better choices. I more often choose correctly the first time, because I don’t have room for waste, and when I choose poorly, I learn from the mistake immediately. It has the added benefit of being known for paying folks who work with me promptly.

2) I’ve learned to value the currency of referrals and recommendations to help me navigate the choppy waters of not wasting my business’s money.

3) I make less trips and go to fewer events but the ones I attend stick with me, and I maximize the things I learn and the connections I make while there and onward.

4) I only commit to events, projects, charities and organizations I believe in, as each one directly affects my business’s bottom line and cash flow.

5) I’ve become a better business account manager for having to navigate my own credit issues in the past. This makes managing my client accounts and payments easier, including those times when I have to make the call to send someone to collections or generally follow up on non payment. I bring a unique understanding of that problem to the table that helps me resolve it without outside help more often than not.

6) My deep and personal understanding of the concept of consequences has been one of my most valuable business skills when concepting for clients on anything, not just money.

The drawbacks and challenges I’ve encountered without a line of credit to draw on:

1) The first real drawback has only just now arrived, years later, and oddly, is triggered by my success in growing a cash based business. I need to hire a dedicated sales person. Because I am cash based, I am only comfortable offering commission – I want to make sure they get paid, and that they value their work as directly tied to their income. It would be faster to find a hire if I offered a salary, but I’m willing to wait and continue my current business model of only spending what I actually have.

2) I occasionally miss out on some very cool, potentially valuable stuff, like conferences. This is because I only choose to go to things that will get me business, and lateral networking events take a lower priority.

3) Occasionally this makes capital improvements a challenge. My priority is always to pay the folks I work with first, then bills, then, last me. This means second hand office furniture and other things as compromises, and ends up keeping me focused on growing the business and the bottom line.

My take on credit cards:

Even if I’d managed to fix my credit more than I have (I’ve gotten my personal credit from the low 400s to the low 600s over the years with some solid work, and more to come), I still wouldn’t want a business credit card, especially in this economy. I think they use game mechanics like miles and points that are hard to redeem and fully designed to keep you in debt. I also think they separate you mentally from your money – it doesn’t feel real. On a small scale that leads to trouble like I have had. On a large scale I believe that mentality leads to the economic crisis the entire world now faces. We need to stay in touch with reality, grasp the concept of consequences and see many steps ahead to stay out of trouble on both levels.

Is your business cash or credit? What have you learned from either?

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  • tibbon

    While you need to be careful, business credit can help accelerate things and smooth you through patches. It isn't uncommon for a company that is flush with cash (GE or Apple sized even) to temporarily do some financing on payroll to keep things on a constant/even basis. I

    Smart use of credit can help boost things when needed as well and does offer some perks/protections over using cash. If I were to run a business right now and use credit, I'd get an Amex card and pay it off in full each month. You're still tracking all receipts and expenses, but someone then has your back for chargebacks and such.

    Having a business with strong credit can also help for when you're getting a merchant account of your own. While it isn't instant, formation of a corporation can help separate the business's credit from your person credit as well. Credit can also obviously allow you to do things like purchase goods to fulfill a contract that will pay for the good and also have a margin.

    While I know you didn't say that use of credit is bad/evil, i just wanted to reinforce its use in business.

  • thaddeussetla

    Thank you for this post, it has validated a lot if what I have had to do with a startup like mine

  • My business is 100% cash. I do my homework better and make smarter business decisions when I don't use loans/credit.

    Thank you very much for posting about your experiences climbing out of the bad credit hellhole. 🙂 It's encouraging.

  • My hat is off to you. Like you, I operate on cash & I abhor credit cards. Aside from a mortgage, most every other necessity can be provided through planning, budgeting, thoughtful saving and personal discipline. One of my favorite authorities on getting yourself debt-free is Dave Ramsey. In case you or some of your readers are interested in Dave, check his website for more info: http://www.daveramsey.com. Dave's position on debt is, “Run! Run like a gazelle set free from a snare!” Amen to that.

  • jen

    Like you, I am strictly cash-based, originally out of necessitity, rather than choice. I find that it helps me focus immensely, as in my *old life* I often made impulse decisions and purchases, now that I take teh save and then spend approach I have much less stress (and much less debt)

    jen 🙂

  • Thank you for the validation. To me, credit is too much like “play money” and it makes things too easy for me. I started my business on a shoestring and it is only a step up from there now. Its good to know that successful businesses can be run on a cash basis in the 21st Century!

  • True Brit

    I'm a few time zones ahead of you. I'm still circling the plug hole of debt, paying everyone a little, when I'm clean (deliberate drug reference there!) I too will run my start up in this way. It takes great courage to admit your bad decisions but the advice and hope you will give others is all to the greater good. Well done you.

  • I like the mental image of the plug hole of debt. Very apropos.

  • Yes they can. It takes a lot more work, but I'm here to offer encouragement – people really can make something from nothing. I've done it.

  • Yes, there are times when this is mor frustrating then just having access to a line of credit would be, but it is definitely less stressful, always.

  • 🙂

  • I'm glad it seems to be helpful to people to hear this perspective – I know I could have used these words of encouragement when I first got started!

  • 🙂

  • Hi David 🙂 Glad you stopped by. I don't think credit is evil, but I do think that it's removal of money as a tangible object can get people and businesses in trouble. It's that mental thing that it makes money seem less real somehow, or like it won't ever run out. If folks can battle that mentality and use it well, then by all means go for it!

  • I agree 100%. Cash is king (or queen in our case). I have also learned this lesson the hard way, and feel stronger and more sure of myself and my decisions because of it. It does take courage to admit bad decisions, and it also shows that you have confidence in yourself. Congrats and continued success!

  • Took two steps back on number 5 in 2011 🙂 D’oh.

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