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Don't try this at home. How credit card arbitrage funded my first company.

150 points by jaf12duke 15y ago

scarmig 15y ago
tl;dr: "And, so I raised my money through credit card arbitrage: $22k across 14 different cards. So, yeah. That's about it... For me, it worked out both terribly and perfectly. The terribly part is that our startup failed, and I never paid myself enough to pay the cards back. At the end of Openvote, I was saddled with all this credit card debt, plus opportunity cost loss from no salary, plus no job. It was a tough time." It's a lesson in what not to do, as the author acknowledges. Though he seems sanguine enough and has got back up on his feet. Then again, I think there are easier ways to learn it's not a good idea to rack up five figures of credit card debt on top of existing debt and no savings... but whatevs.
dholowiski 15y ago
Wow... that takes balls. Getting 0% introductory rate credit cards, and taking a cash advance... and then putting the cash in a bank account that pays interest. Of course, if the business fails - as it did in the author's case - then you're stuck with all of the debt and a broken credit record, but it's all about taking risks right?
- rgraham 15y ago
  Taking a calculated risk is not the same as playing roulette. Poor choices should not be glorified in the name of entrepreneurial risk.
- Duff 15y ago
  As long as you have the ability to start earning quickly and are smart about it, you can get through that without breaking your credit record. The key to dealing with credit cards is understanding the terms -- it's all written down in a little document that nobody reads. In particular, you need to understand precisely how each lender defines "default". "Default" == no more 0%. Also, this guy had the business networking chops required to jump into consulting gigs immediately upon declaring failure. The exit strategy is essential. I did something similar to this with a house that I needed to get out of quickly. I borrowed $52,000 over several cards and ended up using $40k. The $12k was used as a pool to make the automatic payments from. End result? The value of the home increased by $80k.
- ebiester 15y ago
  We're very fortunate in this country for a liberal bankruptcy law, at least for when it comes to taking this kind of risk. Now, this kind of risk won't work as well in this economy. Credit cards have severely curtailed their introductory rates. However, in 2002-2007 I knew people who augmented their income multiple times by this same arbitage and putting the money in low risk investment vehicles. Once the intro rates were finished, they would pay back 100% and close the card, moving on to the next one. The credit card reform act will make this more difficult in the future.
eatm0rewaffles 15y ago
Wow, a very pleasant read! For someone who was seriously considering doing this I have to admit your perspective is quite admirable. The only question I am left with is how much did you end up settling for or how long did it take to eventually pay it all off?
0x12 15y ago
For a software startup it is perfectly possible to get off the ground with an outlay <$100 and some of your time. I really don't see the need for dramatic and totally silly strategies like these. Using one hole to plug another never was a really good idea.
- atakan_gurkan 15y ago
  I think you missed the part where he says they had no coders as founders, and also the part(s) where he says "don't do this".
  - deleted 15y ago
    [deleted]
    - nhangen 15y ago
      There's a difference between learning to code, and learning to code well enough to make something worth selling. If it were that easy, everyone in his situation would have done it already - but it's not. I'm an amateur web dev and experimental iOS dev, but in the time it would take me to get good enough to build my ideas from scratch, I could've payed someone to build 5 of them.
catshirt 15y ago
i'm not really well versed in funding or business operations, but this just sounds stupid.
- tomjen3 15y ago
  Generally everybody says you shouldn't start a start up on credit cards. What he went for is the advanced version where you can get free money if you stack the cards correctly. It is difficult to do, but companies and financial investors do it pretty often.
jessriedel 15y ago
> For some personal background, I do come from a financially stable family. My parents could have covered the $16k to help me follow my dreams. But I didn't ask them (and neither did they offer). The financial pressure and responsibility of my startup was to be fully on my shoulders. Even though he wasn't accepting money from his parents, he was implicitly using their financial security to shoulder this risk. If everything had really gone to hell, they would have helped him back on his feet. (Much like some banks could take huge risks knowing the government would probably bail them out, even if there wasn't an explicit agreement or exchange of money beforehand.) Other people, like maybe his friend, don't have such a financial safety net and so can't take on those kinds of risks.
- bradleyland 15y ago
  Credit card debt is, in most states, entirely dischargable in bankruptcy. So while it would be unethical to take on all this debt specifically with the purposes of squandering it, the CC companies are extending you an unsecured loan. It's really not all that bad of an idea, provided you can survive a bankruptcy and a few years of exceptionally poor credit.
  - peteretep 15y ago
    > while it would be unethical to take on all this debt specifically with the purposes of squandering it Actually, in the UK, if they can prove it, it's illegal. Be surprised if that wasn't the same in the West.
    - bradleyland 15y ago
      I actually worked for a US Bankruptcy Trustee in Florida for about three years. It is illegal here as well.
    - djloche 15y ago
      in the united states, if you borrow with the intention of defaulting, it is illegal. What you do with your borrowed funds doesn't matter.
pavel_lishin 15y ago
> Learn how to code so you don't need to hire programmers. Yeah, you can just get one of those "Learn how to Program in 30 Days!" books, and it's just as good as hiring someone who does it professionally. This whole post reads like a big "Don't Do What Donny Don't Does" book.
reidbradford 15y ago
This is the dumbest thing I've ever heard of. I definitely would not want to be blogging about this. What happened to good old fashioned shame and just getting on with your own business? Everyone wants to be a fucking celebrity.
- muhfuhkuh 15y ago
  Wow, you must really hate pg and patio11. They spill about everything openly. What attention whores, amirite? These types of blog posts are merely confessionals with learning points attached that the confessor hopes the reader would find salient. You apparently didn't. And...?
waterside81 15y ago
This is crazy - crazy interesting and crazy nuts. The idea of arbitraging has always be fascinating to me. I've had an idea for currency arbitrage in the travel industry, but never done anything other than back of the envelope calculations. Feel free to take the idea: Tour operators publish their prices for the upcoming year's trips. They publish them usually in one currency, sometimes in two, rarely in three. They're beholden to these prices because they publish brochures and distribute them to places like Flight Centre. So what you do is become a wholesaler of a bunch of tour operators' trips (this is easy to aggregate, many have XML feeds that publish their inventory, including pricing & availability). Then you use real-time exchange rates to figure out which currency it's best to sell in to a customer and then buy the product from the operator using another currency. For example, say the US & CAD dollars are at par when prices are published. If the US drops a lot compared to the CAD, you sell the trip to your customer in CAD but purchase the trip from the operator in US. The beauty is that operators will pay you a commission (usually 20-25%) on top of whatever you gain from the currency arbitrage. There's some complexity in becoming a legal wholesaler and being able to accept multiple currencies etc. At the very least it makes for some interesting math.
- JacobAldridge 15y ago
  And then you get a client like me, who points out that the price in Euros in 10% cheaper than the price in AUD because of currency fluctuations in that period, and I would like to pay in Euros please. The travel agency (in Australia) weren't able to do that for me, however - so it seems their agreement was in a single currency as well. I'm not sure how hard I could have pushed it, because the dates ended up not quite working anyway.
  - waterside81 15y ago
    Ha, yes, but you'd be in the minority of travellers who think like that. But I know of tour operators who refuse to allow this. If you're an Aussie resident, you have to pay AUD. If you're in the EU, you have to pay in EUR etc.
decklin 15y ago
Is this actually considered arbitrage? http://en.wikipedia.org/wiki/Arbitrage http://en.wikipedia.org/wiki/Arbitrage While the 4th credit card company he applies to has imperfect information about what his credit is (at that point) actually worth, it seems like all the deals are independent.
- klochner 15y ago
  No, it's not even close. I was expecting a story about generating profits with arbitrage, and using the profits to fund the company. Though inaccurate, the title was much catchier than: "How credit cards funded my first company"
- ssharp 15y ago
  I'm not sure when this took place, but prior to the credit market crash, you were able to get risk-free savings accounts at around 5% interest. As long as your credit-card rates were below 5%, I think you could call it arbitrage, though it's value is lost in this case since the startup was burning the cash, not just letting the arbitrage run its course and used the proceeds. This wasn't a particularly uncommon scheme in the mid-2000's with easy credit and high savings rates. A rough calculation shows that with a zero-interest card (you could generally negotiate 0% cash-advance checks as well) and a 5% savings account, you could make in the ballpark of $450 over the course of a year per 10k borrowed. If you had good credit and could quickly get access to 100k, you'd be making a few thousand for a not much more than a days work + some short-term damage to your credit score, though at that time, credit scores didn't really mean all that much.
- jarnold 15y ago
  I actually did credit card arbitrage in one of my first startups. We discovered a niche market where online credit card transactions were charged exorbitant rates for low-volume, non-swipe monthly subscriptions. By taking on the risk ourselves we aggregated many smaller sites, and was able to become a merchant bank ourselves. That's arbitrage to me.
  - feral 15y ago
dolbz 15y ago
Maybe I'm missing something but how is this even arbitrage? If you were just putting the money into an interest bearing account and repaying before the interest rate kicked in then yes it would be arbitrage (if you could even beat the 3% fee) but that wasn't happening here. The author was just taking the 0% rates and using them to fund his company which didn't work out. There was never a guaranteed upside to this which is what you would expect with arbitrage.
grayrest 15y ago
I first heard of this in Bram Cohen's (bittorrent) PyCon keynote in 2004 (?). He basically started bittorrent the company this way.
spokengent 15y ago
For bonus points: Find the credit cards affiliate program. Sign up to it, and use it. You might get for example $50 commission, for signing up to a 0% credit card, if you use your affiliate link.
- cosgroveb 15y ago
  I don't think the fraud is really worth $50.
  - spokengent 15y ago
    Several affiliate networks explicitly allow you to use your own affiliate links. Also, if you're more concerned about it and want an easier way, use some reward/cashback program website.
_delirium 15y ago
Back in the mid-2000s, when money-market accounts were paying around 5%, and there were a ton of promotional 0%-balance credit-card offers, people from fatwallet used to use the term "app-o-rama" for this trick of applying for a ton of 0%-balance credit cards all on one day, so that they'd all be approved before the credit score was updated. Then, there were ways to essentially extract the balance as a cash advance w/o it being coded as a cash advance. A few cards (like Citibank's) would let you do a "balance transfer" via a check made out to you, and then you could transfer that balance to others and repeat. The end result was that you could take out a quick $50k or so in credit, put it in a 5% money-market account, and pay it all back 12 months later when the 0%-rate intro promotion would be expiring, netting $2500 interest. You could also start a business with the cash, but that's a bit higher-risk...
monochromatic 15y ago
Arbitrage is not the same as borrowing money.
nhangen 15y ago
I don't get why everyone is hating on the author for his usage of credit cards. It's not the first time I've heard a story like this, and it's certainly not going to be the last. I did something similar with an Amex card, and used it to bootstrap the development I couldn't perform myself. As long as you manage the risk and plan accordingly, it's not as bad of a play as it's made out to be. Also, the author never said anything about bankruptcy, and he seems a man of his word. I didn't get the impression he was going to burn through the cash and then file bankruptcy if it didn't work. In fact, he didn't, and it didn't. When you have a dream, and you believe in it, you do everything you can to make it work.
larrik 15y ago
Kevin Smith used a similar technique to fund his first movie (Clerks). Personally, I think funding a movie with this technique is WAY crazier than a startup.
SurfScore 15y ago
I feel like this is one of those "how to rob a bank" lessons that you find sometimes from old-time thieves. It shows you how to do something to take advantage of the system, definitely a hacker thing to do, but at the same time its very dangerous and often unnecessary. More than one person is reading this article and thinking "hmm..." I think this puts a lot of the "put the house on the line" risk back into startups. Say what you will about the time and effort starting a business takes, in this day and age of venture capital, it is almost stupid to get into that situation. Nonetheless, people have done crazier things, overextended themselves even thinner, and had no contingency plan, and become billionaires. Its all part of the game
- nirvana 15y ago
  Imagine he had $50k in the bank. So he didn't need to use the cards. He takes the $20k out of the bank at the beginning of the year, puts it into the startup, which fails within the year. What's the difference between the two situations? In one, he spent however amount of time earning the $20k before he put it into the startup, in the other he spends however amount of time working off the credit card debt after the startup fails. The real difference between these two is the interest rate on the credit cards, and that's about it. In both cases he has to work to earn the money he put into his startup, though it might be more painful to do it after failure than before. [I think its amusing that this comment has been down voted. I wasn't disagreeing with the person I'm responding to, didn't say anything offensive, and offered a different way of looking at things that seemed to be missing.]
nirvana 15y ago
This isn't credit card arbitrage. Let me describe one idea for how Credit Card Arbitrage could work. You take out a bunch of credit cards, as he describes. Preferably ones with zero interest for the first year, or 6 months. You extract as much cash from them as you can. You put a chunk of that cash in the bank to make minimum payments from, and then you put that cash into an asset that will return more over the next year than the cards will charge. [EDIT TO ADD: Want to clear up some confusion. In order to arbitrage interest rates, you have to have whatever you buy return more than what you have to pay for the money. There's one factor that people often forget when thinking about interest rates, and that is inflation. Dollars spent to pay off a loan are worth less than dollars you get at the beginning of the loan. This means, the asset you put your money into, needs to return not only enough to cover the interests & fees on the credit cards over the time period, but the monetary inflation rate over the time period. Thus, something that is an inflation hedge is beneficial. This is why I talk about gold below, and later I talk about CDs and even stocks.] I'd suggest buying gold, or gold miners, or if you're super sophisticated, options on solid gold mining companies. (each of these has increasing leverage to the price of gold.) But it doesn't have to be gold, it just has to be something that is a "no brainer" way to earn a positive return above the rate of the credit card interest. This may be difficult, and in fact, it should be difficult, because if it were easy the credit card companies would do it instead of loaning the money to you. Potentially, you could take the money from the credit card company and put it into a CD at the very same bank. This works only if you really have "no interest for one year". Buy a 9 month CD (or better yet a 10 month CD), and then when it matures, pay off the credit card, and you get the interest from the CD for free. The thing that makes such arbitrage opportunities so valuable is that, because the asset you're buying returns more than the cost of your money, you can scale it up pretty much infinitely. But this is where things get problematic if you don't cover your downside. When the Bank of Japan was lending money at nearly zero interest, many banks borrowed in japan, converted the money to other currencies, and then bought treasuries of other countries. This is called the carry trade. In fact, I wish I could start up a bank right now. I'd love to borrow money from the Federal Reserve, which is loaning it out at almost nothing, and buy the best bonds (along with some protective put options) I could find on the market. A company wants to borrow for capital expansion, it will pay a reasonable interest rate-- say %6. The Federal Reserve is loaning at something like %1. %5 profit, at the only risk of the bond (so protect it with a CDO.) It must be great to be a bank. If you have a startup you need to fund, and you can get a CD the interest rates right now are about 1.15%. So, I think this doesn't work for arbitrage, because while you may have "zero percent interest" there are going to be some fees that will overwhelm that meager interest rate. But, if you could get a CD that paid out %6, and could borrow at %1 (on the "zero interest" plans) then you'd only need $400,000 in credit card debt in order to raise $20,000 for your startup! Realistically, credit card arbitrage doesn't really work too well. If you get something with a higher rate of return, and you use borrowed money to buy it, then that's really investing on margin and not really something you could call "arbitrage". I'm sure it works for some people doing startups.... but isn't really reproducible on a wide scale. BY the way, if you want access to some of that federal reserve money at cheap rates, at least some brokers are passing it along to their margin customers. Then you can start looking for a solid high yielding company, borrow %50, effectively doubling your yield... don't forget to buy some put options to cover your long position in case it crashes.
benjohnson 15y ago
Kudos for him knowing that he was using his CC to fund his startup. I made the mistake of not realizing that I was using my CC to fund my business - I was using them for food, rent, and other things. A lot of 'regular' businesses fall into the trap of building a lot of short-term debt that isn't really obvious - owing their suppliers, owing their employees, and owing the tax man. When a small hiccup hurts their cash flow, the whole stack of cards comes crumbling down. Or so I've been told.... :)
nostrademons 15y ago
I went for the opposite tack when I founded my startup - live with my parents and do all the coding myself - and I would highly, highly recommend that over the credit card approach. My startup also failed. I also felt it was well-worth it for the experience and skills gained. I also found I loved startups and want to get back into them again. The difference is that when my startup failed, I had money in the bank, no debt, and no particular time limit for finding another source of income. And that gave me options, and options gave me negotiating power. I was able to turn down offers that I felt would be career dead-ends or wouldn't teach me much, and would've even been able to found another startup immediately if the right opportunity hadn't come up. Instead of working 6 months on boring consulting jobs, I was able to spend that 6 months taking a job that taught me things (which has turned into 2.5 years, because the job is still teaching me things).
ryanmarsh 15y ago
I tried this with my first startup. It worked, and my wife and I wound up with a nice little online magazine that did pretty well. Then I got cocky, I tried to do it again but wasn't as careful as the first time. Now I'm digging myself out from under $60k in CC debt. Now I live by 3 before 1, make 3 before you spend 1. We'll see how that works out.
- pointyhat 15y ago
  I did exactly the same, except to get a contract outfit off the ground. I paid off about $60k in total (in GBP) over 10 years. I worked out that in total I made about 20% more than salaried people over the time. It definitely wasn't worth it.
nalidixic 15y ago
Did you ever do a credit report with all those cards? It would be interesting to see how having 14 cards with balances affected your score :P
kevinpet 15y ago
1. This isn't arbitrage. Arbitrage has a specific meaning (profiting from price disparities in the same item in different markets). This could be described as a carry trade, but it's mostly just an inconvenient way to get a business loan. 2. This isn't even correct. It claims that you can get your credit score for free, which is incorrect. When I notice one error, I suspect there are other errors.
- chris_gogreen 15y ago
  I get a free score from all 3 bureaus for free once a year.
  - foxit 15y ago
    No, you get a free credit report from all 3 bureaus once a year. Getting your score costs.
rkon 15y ago
Completely deceptive linkbait title and a worthless blog post about racking up credit card debt. THIS is what gets upvoted on HN now? Pathetic...
techiferous 15y ago
"Learn how to code so you don't need to hire programmers." That's the hidden gem. Only do this if you enjoy programming, though, because it's hard work, especially in the beginning. Expect a year or two to get fluent, not a month or two. But once you know how to program, you don't have to spend time finding scarce developer talent, you don't have to spend time communicating requirements et cetera, and most of all you don't have to pay them $X.
gee_totes 15y ago
I worked with someone who financed a feature film on 67 credit cards. He didn't make his investment back at all, and had to disappear for awhile, as he was saddled with about $300,000 in credit card debt. But when the credit card companies did catch up with him, years later, he was able to settle his whole debt for about 30k. Running from the credit card companies ruined his credit, of course, but I wonder if the author of the article would have gotten a better rate of return if he had just hid from the credit card companies, waiting for them to get desperate enough to settle.
- wanorris 15y ago
  The opportunity cost involved in "hiding" might make this a bad deal though. The author was involved in doing above-board consulting work and planning his next startup. I would expect that taking legal employment under your own name makes you relatively findable. Worse, recruiting investors for a startup is likely to be much more difficult if they perform due diligence on you and discover that you have a history of running away from creditors. Of course, even worse than that is that the author planned his moves carefully in advance. While running off when you owe too much money isn't the best move, planning to run away from your debts might well be prosecuted as fraud.
driverdan 15y ago
This isn't arbitrage but it's a good article anyway. I did something similar about 5 years ago but with "investing" the money in HYIPs (high yield investment programs). I was woefully ignorant of how many of these are scams (99.999%) but managed to make a decent return and not lose my shirt. I wouldn't recommend doing this to anyway. The risks are extremely high.
chris_gogreen 15y ago
You forgot to talk about the part where you use arbitrage, you simply described how to get lots of credit quickly...
chris_gogreen 15y ago
I think you are talking about moving balances between cards, sometimes called floating. It might loosely be arbitrage if you use the cash back features to think of the value of a dollar spent on one card being less than the other. If 3% cash back, spending one dollar on the card really only costs 97% of one dollar, then pay it off with a normal 0% cash back card.
nikcub 15y ago
In most other countries and with some cards the introductory low or zero interest rate is only on purchases and not on cash advances or withdrawls. There are a few ways to get around that. You are probably breaking money laundering laws if you do, though - so, disclaimer. Find a friend or family member who has a small store and merchant account, or setup your own merchant account in a company name, or put up an item on ebay with a buy it now. Create one or a number of fake products with realistic looking prices (some merchant terminals let you enter an arbitrary price). Buy it with your new card and kick back the cash, minus the transaction fee. You can then just keep bumping the balance to a new card when the introductory period is up - just pay the minimum payments (which are usually very low). Juggling to new cards with introductory rates is a lot better than applying for many cards at once. It just looks like you got sick of your last bank for poor service etc.
vicparekh 15y ago
I did this once when interest rates were above 1%. Currently risk-free interest rates are too low for this action to be worth it.
aklein 15y ago
Back when I graduated college in 2002 into the tech bust and kept getting credit card offers to "transfer my balances at zero interest for six months", I took a bunch of zero-interest cash advances and put them into the ING savings account yielding 3-4% at the time. I did it for between 6 months and a year and netted a few hundred bucks before closing them all out. I wouldn't recommend it because a) it was more headache than it was worth to keep track of payments, and b) who knows what it did to my credit score. It was definitely an arb, but probably not operationally worth it...
msutherl 15y ago
One of my co-workers did this in the early 00's, but for the opposite reason: to pay off $50k off capital gains task. Worked quite well for him.
- usaar333 15y ago
  The IRS has pretty high convenience fees if you use a credit card (~2%). In the higher interest early 00's, this might be worth it; today, not so much.
astrofinch 15y ago
"My friends that deferred their startup dreams for high-paying consulting jobs got no closer to learning how to build a startup and, worse, became accustomed to the life that a high salary affords." It seems to me that the simplest way to solve this problem is to keep a very close eye on your standard of living. Personally, I buy most of my food from the dollar store and think of my summer internship savings as a "bankroll" that I should gamble with carefully.
unfed 15y ago
Setup an Adwords campaign say $0.25 CPC. Funnel the traffic to a page where you have Adsense ads paying $0.30 CPC. That's arbitrage for you. Not sure why you guys using gold and CDS as examples on HN.
- wesleyb 15y ago
  You're forgetting something: click through rate. Unless it's somewhere above 90% (in which case you're one hell of a marketer -- or you're paying for the traffic), then you're essentially burning your money.
usaar333 15y ago
Why did submitter take a cash advance? Typically, you can get 0% purchase APR. The correct course of action is to cash advance the minimal amount you need and pay for every purchase you make with your 0% cards. Would have saved this guy a few hundred dollars.
sneak 15y ago
This is the second article I've read on HN in as many days from this blog that ends every post with "my new company $x is going to change how the world does $y"! The title is also inaccurate linkbait. I appreciate self-promotion as much as anyone, but I think this isn't the way to go about doing it.

150 points by jaf12duke 15y ago

tl;dr: "And, so I raised my money through credit card arbitrage: $22k across 14 different cards. So, yeah. That's about it... For me, it worked out both terribly and perfectly. The terribly part is that our startup failed, and I never paid myself enough to pay the cards back. At the end of Openvote, I was saddled with all this credit card debt, plus opportunity cost loss from no salary, plus no job. It was a tough time." It's a lesson in what not to do, as the author acknowledges. Though he seems sanguine enough and has got back up on his feet. Then again, I think there are easier ways to learn it's not a good idea to rack up five figures of credit card debt on top of existing debt and no savings... but whatevs.

dholowiski 15y ago

Wow... that takes balls. Getting 0% introductory rate credit cards, and taking a cash advance... and then putting the cash in a bank account that pays interest. Of course, if the business fails - as it did in the author's case - then you're stuck with all of the debt and a broken credit record, but it's all about taking risks right?

rgraham 15y ago
Taking a calculated risk is not the same as playing roulette. Poor choices should not be glorified in the name of entrepreneurial risk.
Duff 15y ago
As long as you have the ability to start earning quickly and are smart about it, you can get through that without breaking your credit record. The key to dealing with credit cards is understanding the terms -- it's all written down in a little document that nobody reads. In particular, you need to understand precisely how each lender defines "default". "Default" == no more 0%. Also, this guy had the business networking chops required to jump into consulting gigs immediately upon declaring failure. The exit strategy is essential. I did something similar to this with a house that I needed to get out of quickly. I borrowed $52,000 over several cards and ended up using $40k. The $12k was used as a pool to make the automatic payments from. End result? The value of the home increased by $80k.
ebiester 15y ago
We're very fortunate in this country for a liberal bankruptcy law, at least for when it comes to taking this kind of risk. Now, this kind of risk won't work as well in this economy. Credit cards have severely curtailed their introductory rates. However, in 2002-2007 I knew people who augmented their income multiple times by this same arbitage and putting the money in low risk investment vehicles. Once the intro rates were finished, they would pay back 100% and close the card, moving on to the next one. The credit card reform act will make this more difficult in the future.

eatm0rewaffles 15y ago

Wow, a very pleasant read! For someone who was seriously considering doing this I have to admit your perspective is quite admirable. The only question I am left with is how much did you end up settling for or how long did it take to eventually pay it all off?

0x12 15y ago

For a software startup it is perfectly possible to get off the ground with an outlay <$100 and some of your time. I really don't see the need for dramatic and totally silly strategies like these. Using one hole to plug another never was a really good idea.

atakan_gurkan 15y ago
I think you missed the part where he says they had no coders as founders, and also the part(s) where he says "don't do this".
- deleted 15y ago
  [deleted]
  - nhangen 15y ago
    There's a difference between learning to code, and learning to code well enough to make something worth selling. If it were that easy, everyone in his situation would have done it already - but it's not. I'm an amateur web dev and experimental iOS dev, but in the time it would take me to get good enough to build my ideas from scratch, I could've payed someone to build 5 of them.

catshirt 15y ago

i'm not really well versed in funding or business operations, but this just sounds stupid.

tomjen3 15y ago
Generally everybody says you shouldn't start a start up on credit cards. What he went for is the advanced version where you can get free money if you stack the cards correctly. It is difficult to do, but companies and financial investors do it pretty often.

jessriedel 15y ago

> For some personal background, I do come from a financially stable family. My parents could have covered the $16k to help me follow my dreams. But I didn't ask them (and neither did they offer). The financial pressure and responsibility of my startup was to be fully on my shoulders. Even though he wasn't accepting money from his parents, he was implicitly using their financial security to shoulder this risk. If everything had really gone to hell, they would have helped him back on his feet. (Much like some banks could take huge risks knowing the government would probably bail them out, even if there wasn't an explicit agreement or exchange of money beforehand.) Other people, like maybe his friend, don't have such a financial safety net and so can't take on those kinds of risks.

bradleyland 15y ago
Credit card debt is, in most states, entirely dischargable in bankruptcy. So while it would be unethical to take on all this debt specifically with the purposes of squandering it, the CC companies are extending you an unsecured loan. It's really not all that bad of an idea, provided you can survive a bankruptcy and a few years of exceptionally poor credit.
- peteretep 15y ago
  > while it would be unethical to take on all this debt specifically with the purposes of squandering it Actually, in the UK, if they can prove it, it's illegal. Be surprised if that wasn't the same in the West.
  - bradleyland 15y ago
    I actually worked for a US Bankruptcy Trustee in Florida for about three years. It is illegal here as well.
  - djloche 15y ago
    in the united states, if you borrow with the intention of defaulting, it is illegal. What you do with your borrowed funds doesn't matter.

pavel_lishin 15y ago

> Learn how to code so you don't need to hire programmers. Yeah, you can just get one of those "Learn how to Program in 30 Days!" books, and it's just as good as hiring someone who does it professionally. This whole post reads like a big "Don't Do What Donny Don't Does" book.

reidbradford 15y ago

This is the dumbest thing I've ever heard of. I definitely would not want to be blogging about this. What happened to good old fashioned shame and just getting on with your own business? Everyone wants to be a fucking celebrity.

muhfuhkuh 15y ago
Wow, you must really hate pg and patio11. They spill about everything openly. What attention whores, amirite? These types of blog posts are merely confessionals with learning points attached that the confessor hopes the reader would find salient. You apparently didn't. And...?

waterside81 15y ago

This is crazy - crazy interesting and crazy nuts. The idea of arbitraging has always be fascinating to me. I've had an idea for currency arbitrage in the travel industry, but never done anything other than back of the envelope calculations. Feel free to take the idea: Tour operators publish their prices for the upcoming year's trips. They publish them usually in one currency, sometimes in two, rarely in three. They're beholden to these prices because they publish brochures and distribute them to places like Flight Centre. So what you do is become a wholesaler of a bunch of tour operators' trips (this is easy to aggregate, many have XML feeds that publish their inventory, including pricing & availability). Then you use real-time exchange rates to figure out which currency it's best to sell in to a customer and then buy the product from the operator using another currency. For example, say the US & CAD dollars are at par when prices are published. If the US drops a lot compared to the CAD, you sell the trip to your customer in CAD but purchase the trip from the operator in US. The beauty is that operators will pay you a commission (usually 20-25%) on top of whatever you gain from the currency arbitrage. There's some complexity in becoming a legal wholesaler and being able to accept multiple currencies etc. At the very least it makes for some interesting math.

JacobAldridge 15y ago
And then you get a client like me, who points out that the price in Euros in 10% cheaper than the price in AUD because of currency fluctuations in that period, and I would like to pay in Euros please. The travel agency (in Australia) weren't able to do that for me, however - so it seems their agreement was in a single currency as well. I'm not sure how hard I could have pushed it, because the dates ended up not quite working anyway.
- waterside81 15y ago
  Ha, yes, but you'd be in the minority of travellers who think like that. But I know of tour operators who refuse to allow this. If you're an Aussie resident, you have to pay AUD. If you're in the EU, you have to pay in EUR etc.

decklin 15y ago

Is this actually considered arbitrage? http://en.wikipedia.org/wiki/Arbitrage http://en.wikipedia.org/wiki/Arbitrage While the 4th credit card company he applies to has imperfect information about what his credit is (at that point) actually worth, it seems like all the deals are independent.

klochner 15y ago
No, it's not even close. I was expecting a story about generating profits with arbitrage, and using the profits to fund the company. Though inaccurate, the title was much catchier than: "How credit cards funded my first company"
ssharp 15y ago
I'm not sure when this took place, but prior to the credit market crash, you were able to get risk-free savings accounts at around 5% interest. As long as your credit-card rates were below 5%, I think you could call it arbitrage, though it's value is lost in this case since the startup was burning the cash, not just letting the arbitrage run its course and used the proceeds. This wasn't a particularly uncommon scheme in the mid-2000's with easy credit and high savings rates. A rough calculation shows that with a zero-interest card (you could generally negotiate 0% cash-advance checks as well) and a 5% savings account, you could make in the ballpark of $450 over the course of a year per 10k borrowed. If you had good credit and could quickly get access to 100k, you'd be making a few thousand for a not much more than a days work + some short-term damage to your credit score, though at that time, credit scores didn't really mean all that much.
jarnold 15y ago
I actually did credit card arbitrage in one of my first startups. We discovered a niche market where online credit card transactions were charged exorbitant rates for low-volume, non-swipe monthly subscriptions. By taking on the risk ourselves we aggregated many smaller sites, and was able to become a merchant bank ourselves. That's arbitrage to me.
- feral 15y ago

dolbz 15y ago

Maybe I'm missing something but how is this even arbitrage? If you were just putting the money into an interest bearing account and repaying before the interest rate kicked in then yes it would be arbitrage (if you could even beat the 3% fee) but that wasn't happening here. The author was just taking the 0% rates and using them to fund his company which didn't work out. There was never a guaranteed upside to this which is what you would expect with arbitrage.

grayrest 15y ago

I first heard of this in Bram Cohen's (bittorrent) PyCon keynote in 2004 (?). He basically started bittorrent the company this way.

spokengent 15y ago

For bonus points: Find the credit cards affiliate program. Sign up to it, and use it. You might get for example $50 commission, for signing up to a 0% credit card, if you use your affiliate link.

cosgroveb 15y ago
I don't think the fraud is really worth $50.
- spokengent 15y ago
  Several affiliate networks explicitly allow you to use your own affiliate links. Also, if you're more concerned about it and want an easier way, use some reward/cashback program website.

_delirium 15y ago

Back in the mid-2000s, when money-market accounts were paying around 5%, and there were a ton of promotional 0%-balance credit-card offers, people from fatwallet used to use the term "app-o-rama" for this trick of applying for a ton of 0%-balance credit cards all on one day, so that they'd all be approved before the credit score was updated. Then, there were ways to essentially extract the balance as a cash advance w/o it being coded as a cash advance. A few cards (like Citibank's) would let you do a "balance transfer" via a check made out to you, and then you could transfer that balance to others and repeat. The end result was that you could take out a quick $50k or so in credit, put it in a 5% money-market account, and pay it all back 12 months later when the 0%-rate intro promotion would be expiring, netting $2500 interest. You could also start a business with the cash, but that's a bit higher-risk...

monochromatic 15y ago

Arbitrage is not the same as borrowing money.

nhangen 15y ago

I don't get why everyone is hating on the author for his usage of credit cards. It's not the first time I've heard a story like this, and it's certainly not going to be the last. I did something similar with an Amex card, and used it to bootstrap the development I couldn't perform myself. As long as you manage the risk and plan accordingly, it's not as bad of a play as it's made out to be. Also, the author never said anything about bankruptcy, and he seems a man of his word. I didn't get the impression he was going to burn through the cash and then file bankruptcy if it didn't work. In fact, he didn't, and it didn't. When you have a dream, and you believe in it, you do everything you can to make it work.

larrik 15y ago

Kevin Smith used a similar technique to fund his first movie (Clerks). Personally, I think funding a movie with this technique is WAY crazier than a startup.

SurfScore 15y ago

I feel like this is one of those "how to rob a bank" lessons that you find sometimes from old-time thieves. It shows you how to do something to take advantage of the system, definitely a hacker thing to do, but at the same time its very dangerous and often unnecessary. More than one person is reading this article and thinking "hmm..." I think this puts a lot of the "put the house on the line" risk back into startups. Say what you will about the time and effort starting a business takes, in this day and age of venture capital, it is almost stupid to get into that situation. Nonetheless, people have done crazier things, overextended themselves even thinner, and had no contingency plan, and become billionaires. Its all part of the game

nirvana 15y ago
Imagine he had $50k in the bank. So he didn't need to use the cards. He takes the $20k out of the bank at the beginning of the year, puts it into the startup, which fails within the year. What's the difference between the two situations? In one, he spent however amount of time earning the $20k before he put it into the startup, in the other he spends however amount of time working off the credit card debt after the startup fails. The real difference between these two is the interest rate on the credit cards, and that's about it. In both cases he has to work to earn the money he put into his startup, though it might be more painful to do it after failure than before. [I think its amusing that this comment has been down voted. I wasn't disagreeing with the person I'm responding to, didn't say anything offensive, and offered a different way of looking at things that seemed to be missing.]

nirvana 15y ago

This isn't credit card arbitrage. Let me describe one idea for how Credit Card Arbitrage could work. You take out a bunch of credit cards, as he describes. Preferably ones with zero interest for the first year, or 6 months. You extract as much cash from them as you can. You put a chunk of that cash in the bank to make minimum payments from, and then you put that cash into an asset that will return more over the next year than the cards will charge. [EDIT TO ADD: Want to clear up some confusion. In order to arbitrage interest rates, you have to have whatever you buy return more than what you have to pay for the money. There's one factor that people often forget when thinking about interest rates, and that is inflation. Dollars spent to pay off a loan are worth less than dollars you get at the beginning of the loan. This means, the asset you put your money into, needs to return not only enough to cover the interests & fees on the credit cards over the time period, but the monetary inflation rate over the time period. Thus, something that is an inflation hedge is beneficial. This is why I talk about gold below, and later I talk about CDs and even stocks.] I'd suggest buying gold, or gold miners, or if you're super sophisticated, options on solid gold mining companies. (each of these has increasing leverage to the price of gold.) But it doesn't have to be gold, it just has to be something that is a "no brainer" way to earn a positive return above the rate of the credit card interest. This may be difficult, and in fact, it should be difficult, because if it were easy the credit card companies would do it instead of loaning the money to you. Potentially, you could take the money from the credit card company and put it into a CD at the very same bank. This works only if you really have "no interest for one year". Buy a 9 month CD (or better yet a 10 month CD), and then when it matures, pay off the credit card, and you get the interest from the CD for free. The thing that makes such arbitrage opportunities so valuable is that, because the asset you're buying returns more than the cost of your money, you can scale it up pretty much infinitely. But this is where things get problematic if you don't cover your downside. When the Bank of Japan was lending money at nearly zero interest, many banks borrowed in japan, converted the money to other currencies, and then bought treasuries of other countries. This is called the carry trade. In fact, I wish I could start up a bank right now. I'd love to borrow money from the Federal Reserve, which is loaning it out at almost nothing, and buy the best bonds (along with some protective put options) I could find on the market. A company wants to borrow for capital expansion, it will pay a reasonable interest rate-- say %6. The Federal Reserve is loaning at something like %1. %5 profit, at the only risk of the bond (so protect it with a CDO.) It must be great to be a bank. If you have a startup you need to fund, and you can get a CD the interest rates right now are about 1.15%. So, I think this doesn't work for arbitrage, because while you may have "zero percent interest" there are going to be some fees that will overwhelm that meager interest rate. But, if you could get a CD that paid out %6, and could borrow at %1 (on the "zero interest" plans) then you'd only need $400,000 in credit card debt in order to raise $20,000 for your startup! Realistically, credit card arbitrage doesn't really work too well. If you get something with a higher rate of return, and you use borrowed money to buy it, then that's really investing on margin and not really something you could call "arbitrage". I'm sure it works for some people doing startups.... but isn't really reproducible on a wide scale. BY the way, if you want access to some of that federal reserve money at cheap rates, at least some brokers are passing it along to their margin customers. Then you can start looking for a solid high yielding company, borrow %50, effectively doubling your yield... don't forget to buy some put options to cover your long position in case it crashes.

benjohnson 15y ago

Kudos for him knowing that he was using his CC to fund his startup. I made the mistake of not realizing that I was using my CC to fund my business - I was using them for food, rent, and other things. A lot of 'regular' businesses fall into the trap of building a lot of short-term debt that isn't really obvious - owing their suppliers, owing their employees, and owing the tax man. When a small hiccup hurts their cash flow, the whole stack of cards comes crumbling down. Or so I've been told.... :)

nostrademons 15y ago

I went for the opposite tack when I founded my startup - live with my parents and do all the coding myself - and I would highly, highly recommend that over the credit card approach. My startup also failed. I also felt it was well-worth it for the experience and skills gained. I also found I loved startups and want to get back into them again. The difference is that when my startup failed, I had money in the bank, no debt, and no particular time limit for finding another source of income. And that gave me options, and options gave me negotiating power. I was able to turn down offers that I felt would be career dead-ends or wouldn't teach me much, and would've even been able to found another startup immediately if the right opportunity hadn't come up. Instead of working 6 months on boring consulting jobs, I was able to spend that 6 months taking a job that taught me things (which has turned into 2.5 years, because the job is still teaching me things).

ryanmarsh 15y ago

I tried this with my first startup. It worked, and my wife and I wound up with a nice little online magazine that did pretty well. Then I got cocky, I tried to do it again but wasn't as careful as the first time. Now I'm digging myself out from under $60k in CC debt. Now I live by 3 before 1, make 3 before you spend 1. We'll see how that works out.

pointyhat 15y ago
I did exactly the same, except to get a contract outfit off the ground. I paid off about $60k in total (in GBP) over 10 years. I worked out that in total I made about 20% more than salaried people over the time. It definitely wasn't worth it.

nalidixic 15y ago

Did you ever do a credit report with all those cards? It would be interesting to see how having 14 cards with balances affected your score :P

kevinpet 15y ago

1. This isn't arbitrage. Arbitrage has a specific meaning (profiting from price disparities in the same item in different markets). This could be described as a carry trade, but it's mostly just an inconvenient way to get a business loan. 2. This isn't even correct. It claims that you can get your credit score for free, which is incorrect. When I notice one error, I suspect there are other errors.

chris_gogreen 15y ago
I get a free score from all 3 bureaus for free once a year.
- foxit 15y ago
  No, you get a free credit report from all 3 bureaus once a year. Getting your score costs.

rkon 15y ago

Completely deceptive linkbait title and a worthless blog post about racking up credit card debt. THIS is what gets upvoted on HN now? Pathetic...

techiferous 15y ago

"Learn how to code so you don't need to hire programmers." That's the hidden gem. Only do this if you enjoy programming, though, because it's hard work, especially in the beginning. Expect a year or two to get fluent, not a month or two. But once you know how to program, you don't have to spend time finding scarce developer talent, you don't have to spend time communicating requirements et cetera, and most of all you don't have to pay them $X.

gee_totes 15y ago

I worked with someone who financed a feature film on 67 credit cards. He didn't make his investment back at all, and had to disappear for awhile, as he was saddled with about $300,000 in credit card debt. But when the credit card companies did catch up with him, years later, he was able to settle his whole debt for about 30k. Running from the credit card companies ruined his credit, of course, but I wonder if the author of the article would have gotten a better rate of return if he had just hid from the credit card companies, waiting for them to get desperate enough to settle.

wanorris 15y ago
The opportunity cost involved in "hiding" might make this a bad deal though. The author was involved in doing above-board consulting work and planning his next startup. I would expect that taking legal employment under your own name makes you relatively findable. Worse, recruiting investors for a startup is likely to be much more difficult if they perform due diligence on you and discover that you have a history of running away from creditors. Of course, even worse than that is that the author planned his moves carefully in advance. While running off when you owe too much money isn't the best move, planning to run away from your debts might well be prosecuted as fraud.

driverdan 15y ago

This isn't arbitrage but it's a good article anyway. I did something similar about 5 years ago but with "investing" the money in HYIPs (high yield investment programs). I was woefully ignorant of how many of these are scams (99.999%) but managed to make a decent return and not lose my shirt. I wouldn't recommend doing this to anyway. The risks are extremely high.

chris_gogreen 15y ago

You forgot to talk about the part where you use arbitrage, you simply described how to get lots of credit quickly...

chris_gogreen 15y ago

I think you are talking about moving balances between cards, sometimes called floating. It might loosely be arbitrage if you use the cash back features to think of the value of a dollar spent on one card being less than the other. If 3% cash back, spending one dollar on the card really only costs 97% of one dollar, then pay it off with a normal 0% cash back card.

nikcub 15y ago

In most other countries and with some cards the introductory low or zero interest rate is only on purchases and not on cash advances or withdrawls. There are a few ways to get around that. You are probably breaking money laundering laws if you do, though - so, disclaimer. Find a friend or family member who has a small store and merchant account, or setup your own merchant account in a company name, or put up an item on ebay with a buy it now. Create one or a number of fake products with realistic looking prices (some merchant terminals let you enter an arbitrary price). Buy it with your new card and kick back the cash, minus the transaction fee. You can then just keep bumping the balance to a new card when the introductory period is up - just pay the minimum payments (which are usually very low). Juggling to new cards with introductory rates is a lot better than applying for many cards at once. It just looks like you got sick of your last bank for poor service etc.

vicparekh 15y ago

I did this once when interest rates were above 1%. Currently risk-free interest rates are too low for this action to be worth it.

aklein 15y ago

Back when I graduated college in 2002 into the tech bust and kept getting credit card offers to "transfer my balances at zero interest for six months", I took a bunch of zero-interest cash advances and put them into the ING savings account yielding 3-4% at the time. I did it for between 6 months and a year and netted a few hundred bucks before closing them all out. I wouldn't recommend it because a) it was more headache than it was worth to keep track of payments, and b) who knows what it did to my credit score. It was definitely an arb, but probably not operationally worth it...

msutherl 15y ago

One of my co-workers did this in the early 00's, but for the opposite reason: to pay off $50k off capital gains task. Worked quite well for him.

usaar333 15y ago
The IRS has pretty high convenience fees if you use a credit card (~2%). In the higher interest early 00's, this might be worth it; today, not so much.

astrofinch 15y ago

"My friends that deferred their startup dreams for high-paying consulting jobs got no closer to learning how to build a startup and, worse, became accustomed to the life that a high salary affords." It seems to me that the simplest way to solve this problem is to keep a very close eye on your standard of living. Personally, I buy most of my food from the dollar store and think of my summer internship savings as a "bankroll" that I should gamble with carefully.

unfed 15y ago

Setup an Adwords campaign say $0.25 CPC. Funnel the traffic to a page where you have Adsense ads paying $0.30 CPC. That's arbitrage for you. Not sure why you guys using gold and CDS as examples on HN.

wesleyb 15y ago
You're forgetting something: click through rate. Unless it's somewhere above 90% (in which case you're one hell of a marketer -- or you're paying for the traffic), then you're essentially burning your money.

usaar333 15y ago

Why did submitter take a cash advance? Typically, you can get 0% purchase APR. The correct course of action is to cash advance the minimal amount you need and pay for every purchase you make with your 0% cards. Would have saved this guy a few hundred dollars.

sneak 15y ago

This is the second article I've read on HN in as many days from this blog that ends every post with "my new company $x is going to change how the world does $y"! The title is also inaccurate linkbait. I appreciate self-promotion as much as anyone, but I think this isn't the way to go about doing it.