Using credit cards for funding is a popular choice among entrepreneurs, but not without a good degree of caution.
While they can provide quick cash when it’s most necessary to grow your business, there are many different factors and risks to consider before deciding whether they’re right for you.
First things first, let’s look at your general options. You can choose personal credit cards or business credit cards, which are specifically tailored to small businesses.
Both come with their own perks and downsides: for example, personal credit card holders are more protected by the government, whereas business credit cards may offer highly competitive rates and valuable rewards.
That being said, combining the two is also a viable option if done strategically.
We’ll talk about all these things in this post and some more to help you gain a better understanding of the pros and cons of funding a startup with credit cards. Let’s dig in!
Pro #1: You Don’t Need Collateral
This is one of the biggest reasons business with very few assets might go for credit card funding. Not having to put up collateral will make it much easier to get your hands on the funds your business needs.
Pro #2: Zero Interest Credit Cards
There are some business credit cards that offer an introductory 0% APR for a limited time period – mostly up to 12 months.
Since you won’t be charged interest for the specified period, these cards can be extremely useful to get your business off the ground and get all the equipment you need right away. It’s basically an interest-free loan.
However, you have to be especially cautious and read the fine print with these types of cards – if it sounds too good to be true, it usually is.
After the introductory period, you’ll start paying interest, so you want to make sure you choose an offer with a decent interest rate that’s going to work well for you in the long run.
Also, keep in mind that this option is going to work well for you only if you repay the balance regularly during the interest-free period.
If you fail to make payments on time, the interest will accumulate and you’ll have to pay it off once the 0% APR intro period expires.
Pro #3: Rewards
You might already be in possession of a personal card that offers reward bonuses such as air miles or even cash. If you start using it for business purchases, you’ll be surprised at how fast you’ll rack up points.
Business cards offer some really amazing rewards programs, and it would be a huge mistake to overlook them. You can accumulate cash rewards that can later pay off a marketing campaign or miles to use for business trips.
Pro #4: Help With Cash Flow Management
Managing cash flow is one of the most common struggles of a new business, as it’s often difficult to acquire the funds to hold you over in the short term. Credit cards help solve this problem effectively.
For example, you can use a credit card to buy inventory so you don’t have to shell out the cash before making any sales. As you sell out the inventory, you’ll be able to make your credit card payments regularly.
With any credit card, you’re essentially positioned to borrow and re-borrow money as you need it – provided that you make at least the minimum payments on time so that your balance stays under your credit limit.
Revolving credit means easier access to funds as you grow your business: as opposed to a business loan, you don’t need to reapply and go through a process every time you need money again.
Con #1: The Risk To Your Personal Finances
If credit cards are your primary financing option, you’re at a bigger risk if things go downhill. Both business and personal credit cards require a personal guarantee.
This means that when it comes to business funding, the owner carries the entire burden and responsibility for charges if things don’t go well.
This is an extremely important point to consider because it means that your credit card company is free to go after your personal assets if your business fails.
Con #2: It’s Probably Not The Cheapest Funding Option
We’ve talked in a previous point about the importance of reading the fine print and choosing a card with a decent interest rate.
This can’t be stressed enough: in a hurry to get their enterprise off the ground, startup founders can easily find themselves in a position where they’re just looking at the perks such as limited-time 0% interest and really not planning ahead.
With the given pros, a credit card might be your best financing option currently – but it’s rarely the cheapest one.
Think about how the current funding option will work out in the future, factor in how you can make use of reward points, and pay close attention to those interest rates.
Con #3: You’re Constrained By Credit Card Limits
You’ll hardly be able to find a credit card with a limit of more than $50 000. That’s a relatively low amount if you’re using only credit cards for funding. It might be enough for the time being, but not enough to reach your expansion goals.
A small business loan can give you access to a lot more funds than credit cards.
Now For A Few Tips
Tip #1. Separating Expenses & Keeping Track
You might already have a personal credit card with available credit that’s going to work well for your current needs. You’re all set – no applications, no waiting, and no work on your part.
However, it’s not a good idea to use a personal credit card for funding your business, if you plan to continue using it for personal expenses as well.
Your transactions get tangled until there’s hardly any distinction between your personal and business finances, which certainly creates undesired complexity and a bookkeeping nightmare.
In case you start missing some payments, you’ll end up damaging your personal credit score so that there will be a smaller chance of getting approved for any kind of credit, both business and personal, in the future.
Make sure to segment your business transactions as well. The best thing you can do is to use different cards for different business transaction types while keeping your personal finances entirely separate.
For example, you can use a zero-interest personal card for funding your business and a business card for everyday expenses. That way, you can have the debt stability of a personal card and accumulate valuable rewards through the business card.
Tip #2: Mind Your Credit Score
Credit-card issuers will look at your personal credit reports no matter which type of card you’re applying for – including any type of a business credit card.
That’s why it’s important that you monitor your personal credit score and try to maximize it before applying. You can even get a new personal credit card just so that you can pay off the bill regularly so that it affects your credit files positively.
Another thing to consider is that funding your startup with credit cards can be leveraged to help you establish good business credit.
Plan strategically so that you’re able to pay off the bill properly each month, and you’ll later be able to rely on your positive credit file to apply for business loans and get lower rates.
Tip #3: Weigh The Pros & Cons
With the pros and cons listed above, you can see how it’s not a straightforward choice – and it really depends on your given circumstances.
Determine your funding needs and make sure to examine and compare all the other funding options, such as term loans or startup loans from the alternative lending market.
If you decide to fund your startups with credit cards, make sure to establish a viable plan for keeping you on track with payments and reaping all the benefits.
Editor’s Note: This article is part of the blog series Start Your Business brought to you by the marketing team at UniTel Voice, the virtual phone system priced and designed for startups and small business owners. Also, this article is not legal advice. Any views or opinions represented in this post belong solely to the author.
Disclaimer: While every reasonable effort was made to ensure that the above information is accurate, UniTel Voice, LLC. does not guarantee that this blog post is accurate and up-to-date. UniTel Voice, LLC does not accept responsibility for any loss, damage or legal action incurred by your company as a result of the information contained in this blog post.