Using Credit Cards to Finance Your Start-up
by Daniela Baker at CreditDonkey
Many people are using credit cards these days to finance their start-up business. Their reasoning is varied but often is tied to the convenience that a credit card presents. However, before you jump into financing your start-up with credit cards, it is important for you to research the risks involved as well as the alternative modes of financing that are available to you, as Daniela Baker from CreditDonkey now explains.
Why Entrepreneurs use Credit Cards to Finance Start-ups
Many consumers wonder why entrepreneurs are using credit cards to finance start-ups. Owner of Business Finance Solutions, Sam Thacker, shared with Fox News that it’s a practice that has evolved over the last 20 years; it has especially picked up in the last couple of years due to the financial crisis of 2008. According to Thacker, since 2008, small business lenders have tightened their credit policies making it more difficult to secure a small business loan.
As stated by Thacker, the biggest appeal to utilizing credit cards to finance a business is that it’s available credit. “If you report a high enough income and your credit score is high enough, they’ll approve you for $50,000, $75,000, even $100,000 credit card limits–which could be enough to get your business going.”
Other benefits that have been found by those who utilize their cards to finance or partially finance their business are:
- It can be easy to have your credit limit extended. If you are making your payments on time each month (including your other debts), then many credit card companies are willing to extend your limit.
- You don’t get stuck paying interest on funds you didn’t need. With a small business loan, you end up securing a specific amount of funding. It can be difficult to determine how much you will need. This can potentially leave you getting a larger loan than what was actually needed, meaning you have to pay interest on funds that you won’t even spend.
- You determine how to spend the money. If you utilize investors for initial start-up costs, they often like to have a say in how that money is spent. This can sometimes slow down the process if you don’t see eye-to-eye.
- Credit cards make it easy to track spending. Many credit cards now itemize your purchases by merchant categories, making it easy for you to see how your business is spending its money. This is useful for creating budgets for future years.
Proceed with Caution
While there are some definite benefits to financing your start-up with credit cards, there are potential risks involved. It’s important to be mindful of these risks and proceed with caution. Otherwise, you could end up in personal debt and harm your credit score.
Here are the risks that you will want to keep in mind:
- You are taking the personal financial risk for your potential business. If your business is slow to grow, your personal bank accounts could be hit hard, as you will be personally responsible for paying the credit card.
- Your credit is also taking on the risk. Personal credit cards are going to affect your personal credit score. Be mindful of this before you start charging large expenses to your card. Getting behind on your credit card payments or going over your credit limit could mean higher interest rates on future auto or home loans.
- Watch out for unnecessary spending. Credit cards are easy to use. Sometimes they’re too easy to use, making it easy to get into debt from just a couple of months of spending.
Tips for Responsible Credit Card Usage
If you do choose to use your credit card to finance your start-up, here are some tips for you to use to ensure you are being responsible with your usage:
- Pick the best card. Before you start charging business expenses, make sure you’re using the best credit card for your situation. Take the time to find a card with the best rates and fees. You may even want to look into a card with a low introductory rate or balance transfer promotion. This will help you cut down the costs of your initial expenses and help take care of any outstanding balances you have on high-rate cards.
- Separate play from work. Even if you are using a personal credit card for business expenses, you will likely want to get a separate credit card for these purchases. This will help you monitor your business expenses without having to muddle through your grocery and other personal expenses.
- Plan your payments. Make sure you have created a plan on how you plan to pay off the credit card. Take the time to make financial projections on your company so you know you will be able to pay for your business purchases based on sales projections. Always make sure you have enough cash set aside to cover your minimum required payment. If possible, pay more than the minimum to decrease your interest expenses.
- Set a budget. Determine how much you are comfortable charging to a credit card on a monthly basis for your business. Once you reach your limit, find another source of financing. This will help safeguard your personal finances.
Other Financing Options
There are many other financial options available to small business owners. Some options currently available include: small business loans through private banks, business credit cards, investors and government grants.
You may want to consider some of these options before you utilize your credit cards to finance your start-up. Or, you could use a combination of financing options along with your credit card. Choosing multiple financing options will help spread out the financial risk of a start-up so your personal bank account doesn’t have to take all of the strain during the initial months of activity.