Credit card borrowing has many benefits, including the ability to control equity, access to cheap capital, and avoid collateral. There are many cons to borrowing, including credit damage, liability, credit damage, credit loss, insufficient financing, and qualification issues. This article is intended for entrepreneurs who may be interested in using a credit card to finance their startups.
Credit cards can be a useful tool for financing your small business if used properly. You might consider using a credit card to finance your startup. It’s the best way for some entrepreneurs to start a new business. Clutch conducted a 2020 survey and found that 13% relied on plastic to raise startup capital.
Odysseas, a former senior director at Capital One says that financing a new venture using credit cards can be risky and difficult. Papadimitriou is the founder and CEO of WalletHub’s credit card comparison platform WalletHub. He also gave us some insight on how to charge business expenses for a credit card.
Pros of Using Credit Cards as Startup Businesses
Although it might sound risky to borrow money to finance your business venture, there are good reasons to do this.
Papadimitriou stated that the benefits of using credit cards to finance a startup go beyond convenience. The benefits are great, no matter if you apply for a new card or use an existing card.
Also read: How To Find The Best Credit Card
People who are willing to take risks when launching their startup believe that they have profitable ideas. It can be appealing to retain control.
The more you can take your business idea beyond the point of outside funding, the more equity you can retain for yourself and the less you’ll need to manage. Your company’s interest will remain with you when you use your credit card.
Low Interest Deals
Banks have a tendency to offer attractive packages to creditworthy people and business owners due to the widespread availability of low-interest rates. For a limited period, many credit card issuers offer 0% rates. Some offer 0% interest rates for new purchases, while others allow for balance transfers.
Your company can avoid paying financing fees for up to a year on past or upcoming purchases. This will allow you to improve your bottom line. One compelling example is the Slate Edge by Chase which offers 0% APR for purchases and balance transfers for up to 18 months. Balance-transfer fees are typically 3% of the amount that you transfer over, but there is no fee.
No Collateral Requirement
A bank will give you a line of credit or a business loan. You must be ready to provide collateral, such as inventory or property. Many of these products can be secured. Most credit cards are unsecured so you don’t have to raise funds to get credit.
Cons of Using Credit Cards as Startup Businesses
There are many potential problems when financing a startup with a credit card. Before you apply for a credit card and use it to launch your business, it is important to understand what they are.
Business and Personal Expenses are Intertwined
You can make it difficult to distinguish between your personal and business finances when you use a credit line to finance a business venture. It is important to keep these changes separate. This takes dedication. Mixing them will cause problems in your accounting, making tax time more difficult as you will have to sort through the line items to determine deductible costs.
Potential Credit Score Damage
Even if you believe your startup will succeed, almost all startups are risky. You are risking your credit score by using a credit card to fund your startup. Your credit report will show everything you do with the account. If you make late payments or charge too much, your score could be affected. This will make it difficult to apply for credit products.
Personal Risk In a Lawsuit
If your business fails, the credit card debt will become your financial and legal responsibility. Collectors might try to recover what is owed from your company’s assets as well as your personal income. You can be sued for any unpaid balance if you fail to satisfy the liability.
Lenders Are Not Guaranteed
The issuer will evaluate your ability to repay and your credit standing before you are approved for a business card. Your credit score and credit history may be affected if you have had credit problems in the past. You may not be eligible for the best cards to help your business grow or launch.
Credit cards are often unsecured so the issuer is taking a lot of risk by granting large credit lines. Spending limits for credit cards may be lower than those for secured loans or lines of credit. Credit cards typically start at $50,000. A credit card can be enough to cover a large amount of money if you are in dire need.
Ease of Overextension
Credit cards make it easy to spend more than you can pay back within a short period of time. You could end up with a lifetime of debt if you do this. The financing fees for credit cards can be very high because of the high rates and interest compounds. If you want to apply for other financing options, this debt could make it difficult, especially for loans with better terms.
How to Finance Your Startup Using A Credit Card
You can still finance your business using a credit card. Here are some tips for doing it right.
1. Create a Charging Plan
Before you even make a single payment, determine the purpose of your credit card. It may be that you only want to use the credit card for shipping or marketing expenses. You should never load everything onto the card. You have greater flexibility in charging and rolling over balances with a 0% APR credit card. However, make sure to pay off the debt before the regular rates kick in.
2. You can Take on Short-Term Debt
Be a good habit and pay off all outstanding balances by the due date. You will receive a 30-day loan that is interest-free. You may need to extend the loan for longer periods of time. You can calculate how long it takes to get rid of credit card debt in a few installments and then you can commit to the payment schedule until your balance is zero.
3. Maximize Your Rewards
A business owner can make a great friend of a credit card that offers a lot of rewards. A new card with an introductory bonus can be a great way to get started. If you charge a high price for a card, the issuer will offer cash or points.
Bank of America’s Business Rewards Mastercard offers a $300 statement credit for accounts that have been opened within the first 90-days of opening them. To keep your rewards coming, you should use the rewards card according to your charging plan. You will reap the benefits of the process by paying off the balance before interest is charged.
Alternative of Credit Card For Startup
Credit cards are a great addition to your business’s wallet, but there are other options.
Don’t look past your personal financial capabilities. You should consider tapping into any money you have in savings or an investment account. You can also make use of the equity in your house with a home equity credit (HELOC), or you could sell valuable items to raise funds for some expenses. You will be more likely to spend your cash wisely the more you have invested in your business.
You can get a business loan from a bank or credit union. This is ideal for large expenditures you need to repay over time. Fixed monthly payments make it easier to calculate what you will need to send each month. Interest rates are generally lower than credit cards. Our overview of the top business loans for 2022 will help you see what’s currently available.
Family and Friends
You may find people who trust and love you willing to lend money for your business. This type of loan should be taken with extreme caution. You can’t repay the person if it doesn’t work out. Both sides must agree to all terms. This includes how and when they will repay the money. Each party should sign and file a copy of the agreement.
Another option for funding is to find wealthy individuals who are angel investors into your startup or a venture capital firm interested in supporting your idea in return for a stake.
Crowdfunding sites like Indiegogo and Kickstarter are another way to raise spending money. You may be required to send your supporters products, equity, or interest in exchange.
There will always be pros and cons to any funding source you choose to start your business. It is not enough to just throw money at a startup.
Papadimitriou stated that “Efficient and effective use of money is essential, along with a lot of hard work, luck and a lot of hard work.” It is almost always a good idea to borrow conservatively.