Getting Caught up in Infinite Debt

Or How Credit Card Interest Rate Rules Help Destroy Entrepreneurs

If you happen to be one of those peculiar people who love to start businesses you have to know how to handle debt. It is not an optional skill it is a required one. Few people who live in the world of confusion and promise that  offers them a handle on their own destiny do it without going massively  in hock. Debt and equity are two sides of the coin entrepreneurs flip when they design a new business. It is usually all done with OPM, (Other People's Money).

There is a lot of talk about taxes killing entrepreneurial motivation. I have never seen an Entrepreneur who had the straws of success in their scary-crow cranium that quit because taxes loomed large in their world. I have seen hundreds of them lose out because debt crushed their dream. If you have a weak stomach or a faint heart it is a lot better for everyone if you never try to start your own business. It is hard!

The number of people who cannot qualify for a Small Business loan guaranteed by the Federal Government's S.B.A. Program is huge. Bank loans without the government's involvement are even harder. Most people who try building businesses have failed at least once before they succeed. Once you fail it is really hard to get a business loan. Up to the recent past credit cards have become easy to obtain. So guess what most entrepreneurs use to finance their businesses?

The only problem is that the credit card companies have a strategy for recovering losses. They charge a risk premium for people who they deem have become risky in the process of building up a debt burden. That seems sensible and Congress passed that rule to try and reduce losses by credit card companies. No conspiracy there just good intentions. Trying to make everyone able to get a credit card does not seem bad at first. Credit is the foundation of a good life. It is also a bet on your future.

Meanwhile on the way to success a lot of things happen to good people. Illness, loss of a critical job at a critical time, clients come and go away after you have ramped up to meet their needs. You name it and your business will experience it. That means maintaining payments on credit cards can be difficult. If you miss one payment the interest rate may shoot up from ten to twelve percent to thirty percent or above. That is the Risk Premium at play.

Debt that was finite and could eventually be repaid is at that point approaching infinity. Infinite debt is beyond the human capacity to deal with in most cases. Oh sure you could refinance all of that credit card debt but if you could have done that you would never have used the credit cards in the first place.

Catch 22,one of my few real candidates for the Great American Novel, is now a phrase that describes the problem. The far older phrase, “You can't get there from here,” also works. The possibility of success is gone and so is the possibility of repaying the debt. 

Just do the math yourself and you will understand the problem. Unless you can pay the debt off far faster than your original interest rate required you just lost all of the cookies and dropped the cookie jar. The answer is credit structures that do not reduce the potential for success in order to make the money recoverable by the debt holder. Hopefully this new administration sees that issue differently than the old one.

Without easily obtained and adequate debt financing new businesses cannot form and survive long enough to grow. Equity is a story for another time. That too is full of pitfalls and troubles in the current climate. But infinite debt is a bad strategy. It does not reduce risk. In fact, in times like these, the risk that debt climbing too fast to be repaid, will not, becomes infinite too!!!