A recent article written by Scott Shane in Business Week titled “Tougher Access to Credit Cards Benefits Entrepreneurs” highlights just how ridiculous some people’s understanding of entrepreneurship really is. Even an entrepreneurship “expert” like Scott Shane (who is a Professor of Entrepreneurial studies at Case Western Reserve University and has actually written a book on entrepreneurship titled Illusions of Entrepreneurship: The Costly Myths That Entrepreneurs, Investors, and Policy Makers Live by) can get it wrong from time to time.
In the article Shane attempts to make the case that contrary to the “myth” that making it harder for entrepreneurs to get access to lines of credit via credit cards is a bad thing is in fact a good thing (so he says). Since credit cards are overwhelmingly used by most small business startups to fund their initial operations Scott Shane believes that it is actually helpful to make it very tough for entrepreneurs to get access to credit cards so that it will “squeeze out unprepared startups”.
This argument is patently false. Making things more difficult for people to start businesses is almost never a good thing. Whether these business startup roadblocks are in the form of decreased access to startup capital (aka credit cards) or whether it is onerous requirements for submitting paperwork and wading through regulatory red tape – neither of these things help entrepreneurs or the US economy as a whole which relies tremendously on small business and in particular innovation in the small business arena.
When Shane says that making it difficult for a new small business owner to get approved for a credit card is a way of “squeezing out” the startups that are unprepared what that in effect also means is that it also squeezes out those startups who have a great idea and great execution but also have a less than stellar credit history. It also means that no matter how successful a new startup may be and not matter how much it may benefit the economy as a whole – that startup could have its wings clipped before it even got a chance to attempt to get off the ground by being denied to potentially the only form of financing that is available for many startups: credit cards.
Certainly Scott Shane makes a valid point in that higher interest rates on credit cards will force out entrepreneurs that do not have a quick ROI that is greater than their credit card interest rate. That is a valid point but is that really something that we should encourage? I am all about the best and the brightest succeeding but it is a fact that certain startups just take longer than others to reach profitability.
So, just like the fact that if credit cards are harder to get then it harms those entrepreneurs who have less than perfect credit then it is also fact that if credit card interest rates jump from say 12% APR to 20% APR then it will “squeeze out” many potentially great companies who while able to initially service the debt load of 12% could not service the debt load of 20% APR. Both of these scenarios are very bad things for entrepreneurs and the economy as a whole.
In the fashion of many academics that teach about something rather than practice something Shane neglects the fact that not all startups are the same. Some reach profitability and a high ROI almost immediately while still many many others take much longer to achieve a high ROI and in turn become successful. Shane also neglects to take into account the fact that many entrepreneurs are serial entrepreneurs who may fail at one startup attempt but then succeed on the next after learning valuable lessons. To chop these entrepreneurs off at the knees by in effect requiring them to have an extremely successful idea right out of the gate on the first try and that must achieve a quick ROI is not only quite ridiculous but also a bad thing for entrepreneurs in specific and the US economy as a whole.
Granted, it can still be difficult to obtain a small business credit card and that is why many entrepreneurs choose to use a personal credit card that is either a low interest rate credit card or a rewards credit card and then just reimburse from their business checking account. Use our free “Chaser” tool to find and compare the best credit cards today!
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