You might consider financing your startup with a credit card. It’s risky, but if done correctly, it can provide much needed capital to launch your business.
Financing with Credit Cards?
The Good, the Bad & the Ugly
The idea has been germinating in your mind for years now, and it’s finally time to take that leap and launch your own business. You’ve done your research and you’ve got a well thought out business plan. Now it’s time to find support, as in money. You might consider financing your startup with a credit card. It’s potentially risky, but if done correctly, it can provide much needed capital to launch your business.
Credit cards can be useful financing tools for your small business. The upside of credit card borrowing includes keeping control over equity, accessing inexpensive capital, and avoiding collateral. The downside of borrowing includes the possibility of merged expenses, credit damage, liability issues, insufficient funding and qualification challenges.
The upside of credit card borrowing includes keeping control over equity, accessing inexpensive capital, and avoiding collateral. The downside of borrowing includes the possibility of merged expenses, credit damage, liability issues, insufficient funding and qualification challenges.
THE GOOD
Using Credit Cards As Startup Capital.
Maximum Equity
People willing to take the risks associated with launching a startup believe they have lucrative ideas on their hands. Maintaining full control can be attractive. The further you can take your idea without outside help, the more of your company’s equity you can keep for yourself. The more you can keep for yourself, the less oversight you’ll have to deal with. When you use a credit card, your company’s interest stays with you.
Low or No-Interest Deals
The presence of low interest rates has made it common practice for banks to offer appealing packages to creditworthy individuals and business owners. Many credit card issuers offer 0% interest rates for a limited time. Some are for new purchases while others are for balance transfers.
If you can dodge finance fees for a year or more on upcoming or past purchases it can really help your company’s bottom line. Just one example is the Slate Edge by Chase, which offers 0% APR on purchases and balance transfers for 18 months. There is also no balance-transfer fee, which is typically 3% of the amount you shift over.
No Collateral Requirement
If you request a business loan or line of credit from a bank, be prepared to offer collateral which can include inventory or property, since many of these products are secured. Most credit cards are unsecured, however, so you won’t need to scrounge up funds to enjoy access to the credit line.
THE BAD
There’s also a host of potential problems associated with financing a startup by credit card. You need to know what they are before applying for and using a card to get your business off the ground.
Intertwined Business & Personal Expenses
If you use a credit card to fund a business, the distinction between business and personal finances can blur. You will need to keep all of those changes totally separate, which requires dedication. It can boil down to lunches, dinners and entertainment expenses becoming intertwined. If they do become mixed your accounting will be off, and that will make tax time more complicated because you’ll have to sift through line items to identify deductible expenses.
Potential Credit Score Damage
When you use a credit card as a source of funding, you are gambling with your personal credit score. Everything you do with the account will be recorded on your credit reports, and if you charge too much or miss payments, your score will decline. This can stay on your report for a few years. That will put you in a tough spot when you want to apply for other credit related products.
Low Limits
Because credit cards are unsecured, the issuer takes considerable risk in granting a large credit line. For this reason, spending limits could be lower than they are for secured loans and lines of credit. Credit cards usually max out at the $50,000 mark. If you need to borrow a greater sum, a credit card alone can leave you short on essential funds.
No Guarantee for Lender
To qualify for a business credit card, the issuer will weigh not only your ability to pay, but your personal credit standing. If you’ve had problems with credit in the past, your credit report and credit scores may already be damaged. If that’s the case, you may not qualify for the best cards to help you launch or grow your business.
THE UGLY
Ease of Overextension
Spending more than you can afford to pay back in a short time period is extremely easy with a credit card.
If you do, you will end up in debt that can follow you for years. Since many credit cards have high interest rates and are compounded, the financing fees will make the balance very expensive and challenging to pay down.
If you do want to apply for different financing options, sizeable credit card debt (as compared against your start-up’s income) can make you ineligible, especially for loans with more preferable terms.
Personal Risk for a Lawsuit
If your company doesn’t succeed, the debt you incurred with the credit card will be your financial and legal responsibility. Collectors may attempt to recoup what is owed not only from your company’s assets, but also your personal income and assets. If anyone else’s name is on the accounts such as a spouse, family member, or friend, they could be held liable as well even if they’re not associated with the business. If you don’t satisfy the liability, you can be sued for the unpaid balance.