Rebecca Minkoff’s Success: A Testament to the Importance of Personal Credit

Nobody likes paying interest on a credit card bill. It may seem like an easy out to just have Congress forbid it. But what people might not realize is using government to impose a cap on those rates will do more to shrink access to credit, especially personal credit, than help people out of debt. Unfortunately, our elected representatives in Congress may not realize this, either, given the looming bills in both the House and the Senate that threaten just such an interest rate cap.

Access to personal credit is not only important for managing household expenses and budgets, but also for new business formation. Consumer and business credit may seem different, but the reality is that emerging entrepreneurs often have no choice – given the risk-averseness of banks and seasoned investors – but to dip into their own personal lines of credit.

Personal credit has been an accessible path for financing new businesses for entrepreneurs. One notable example is the eponymous global fashion brand Rebecca Minkoff, founded with $60,000 in personal credit card debt and a co-signer, the designer’s father, to secure a higher limit. Her experience tracks with data from the Kauffman Foundation, which found that nearly 10 percent of new businesses use personal credit cards as a source of funding.

The designer produced her inaugural five-piece capsule collection in 2001. Just a few years later in 2005, Rebecca struck gold, or more like Amex Platinum, with her “Morning After Bag.” Spotted on the arms of celebrities, like Lindsey Lohan and Lauren Conrad, every American would have set eyes on the bag via People magazine and US Weekly covers in grocery store checkout aisles, making Rebecca Minkoff a household name for the fashionable.

“I knew I was building something, and it was worth it” Minkoff said, reflecting on the struggles of her early years growing the business. To finance her burgeoning business, after exhausting her own credit opportunities, she then appealed to her brother for additional support to help her business grow. In one interview, Minkoff described her brother also using credit to increase his investment: “[His contribution] escalated from $2,000 to $25,000—that’s when he began to use his Amex.”

The investment quickly paid off. Revenues at Rebecca Minkoff LLC went from $5.5 million in 2008 to $17.5 million in 2010. In a 2019 interview, Minkoff said the brand had “north of $100 million” in gross sales. 

The story of Rebecca Minkoff’s initial financing isn’t uncommon for entrepreneurs. The founders of Airbnb and Spanx similarly used personal credit to start their business. Many innovators don’t have enough of a business plan, or enough demonstrated success, to obtain a large dollar business loan from a bank. However, they do have enough motivation and vision to bet on themselves using the financial tools available to them, namely: Personal loans, credit cards, and home equity loans.

A Kauffman Foundation study of startup capital found that 9 percent of new businesses use personal credit cards as a source of funding — more than twice the amount that use business credit cards.

It’s important to note that businesses, especially small ones, use both personal and business cards. Forty nine percent of small employers used personal cards for business purposes, with the smallest firms (less than 10 employees) 14 percent more likely to use personal cards than those with at least 50 employees. However, business credit cards are also useful, especially for normal business operation.

Personal and business credit cards help people track and manage expenses. JPMorgan Chase Institute analyzed business card usage during a period from 2010 through 2022 and found small businesses use credit cards to manage cash flow, especially during the startup phase:

“In 2019, there was $368 billion in small business commercial and industrial loans outstanding, and over 46 percent of this amount was for loans less than $100,000. The majority of loans in this size category were small business credit cards (U.S. Small Business Administration 2020).”

Rather than asking a bank for a short-term line of credit to cover an expense, especially when profit margins are tight, it could be more convenient to use a credit card to manage a short-term need for cash. If a 10% cap on credit card interest rates – as mandated by the previously mentioned bills in Congress — were to go to effect and reduce overall credit access, it’s unclear how business would make up for the reduction in flexibility.

Access to personal credit is not only crucial for managing everyday expenses and budgets but also for fostering new business formation. The story of Rebecca Minkoff exemplifies how personal credit can be a lifeline for entrepreneurs, enabling them to turn their visions into successful enterprises. As Congress considers legislation that may restrict credit access, such as the proposed 10% cap, it is imperative that lawmakers recognize the broader economic implications of such measures.

Read more at The Economic Standard