Hmm. I have a friend that was starting their own practice. It was going to take a good chunk of change over $250,000 to get it running. They had been working in the profession for five years at this point, but they wanted to make sure that they had the right plan in place before jumping into starting their own business. The only thing that was stopping them was the initial capital. They were able to raise the first $40,000 from seed financing, but still needed over $200,000 for equipment, leasing, employees, and working capital.
Aside from seed funding, they looked at SBA loans and other loan types. The problem that they faced with the SBA loans was that they were going to charge an APR of 10%+, which was going to seriously damper the businesses cash flow. You think, 10.5% of $200,000 over the course of 7 years would be $3,372.13 per month. That doesn’t come cheap. After the consultation with an SBA loan representative and my friend’s accountant, they decided to take an alternative route- credit stacking.
What is credit stacking? Well, here’s how it works:
- Essentially, the credit card companies will review your personal credit scores, income, and other relevant qualifications to determine what you qualify for, if anything. You’ll need to have a certain personal credit score in order to qualify for these cards – usually close to 700 or above. When you take one out, you will be making a personal guarantee, not just through the business.
- Often times, when credit stacking, you’ll take out multiple credit cards, which could be a dozen at once. It’s better to target business credit cards rather than personal credit cards because business credit cards may not show on your personal credit reports (just make sure to make your payments on time, otherwise your personal guarantee will affect your score).
- The people that are taking out these credit cards are looking for cards specifically that offer 0% APR for the longest period (think 6-18 months), where you don’t have to pay a dime until it matures.
- After approval of the credit cards, you can liquidate the cards using a line of credit and without incurring a cash advance fee.
- You’ll then have enough cash flow to pay for the credit card’s balance once the introductory term matures, or you can stack another credit card with an introductory term, liquidate it, pay off the previous cards- rinse and repeat.
This is what my friend is currently doing and it’s working for them. This allows them to be able to grow the business quickly where there was limited capital. It also enables him to keep a healthy credit score (as long as he pays on time), and he can continue to have cash flow without being bogged down early on by a hefty interest rate.
There are pros and cons to everything, and credit stacking is no exception to the rule. Many of the companies that will help liquidate your cards, will charge anywhere between 3%-10% to do it. If you wanted to liquidate your credit card for $100,000, this would cost anywhere between $3,000 and $10,000 to do it. It helps if you are experience cash flow issues (which can be the life and death of a business), but it can be a good amount that you have to essentially pay back just for using the service. Also, there is a risk that you don’t earn enough money to pay back the debt if the business isn’t successful. If you aren’t able to pay back the debt, the credit card company will come after YOU as the personal guarantor.
It can help, especially if you don’t qualify for traditional business loans, lines of credit, or an SBA loan. You might actually benefit from this strategy especially if you pay off the credit card balance before it matures out of the introductory 0% APR rate. It’s also a good way to get money in your business account quickly. We’ll see how it works out for my friend, but I think that this could be an interesting way to finance a business.