Is Using a Credit Card to Finance Your Startup a Good Idea?



If you’ve recently taking the plunge and started your own business, and are currently searching for funding to grow your company, using a credit card has likely fallen somewhere on your list of potential options. After all, while you may be struggling to qualify for a bank loan, credit card companies are likely beating down your door with offers of financing.

It’s not uncommon for owners of registered businesses to receive multiple credit card solicitations every day. But could credit cards actually be an appropriate way to finance your business?

Depending on your circumstances, using credit cards for business funding can either be really dangerous or really useful. It’s important to weigh the pros and cons to be sure that you’re making the smartest decision for your business.

To get you started, here are nine situations where using a credit card to finance your startup may not be such a bad idea:

1. When You’ve Already Exhausted Your Personal Resources

Before you seek any sort of debt-based financing to grow your business, consider all your other available options. Do you have personal funds to contribute to your business, or family and friends who could help? Have you looked into bringing on an investor to fund your startup in exchange for equity?

Racking up high-interest credit card debt too soon can swallow revenues for a new business—so no matter your personal reasons for looking to credit cards, they should never be your first line of defense.

Many young business owners are reluctant to invest personal funds or seek help from family and friends, which raises the question: How much do you really believe in your product? If you don’t have enough confidence in your business model to onboard the people who believe in you most, are you sure that you should be going into debt for this business at all?

2. When You’ve Educated Yourself About the Interest Rates

Business credit cards aren’t cheap. In fact, they are one of the most expensive business funding options out there. Interest rates for business credit cards are much higher than for traditional loans, and that kind of costly debt can drain a business during difficult periods.

Even so, credit card financing can be tempting for cash-strapped entrepreneurs, especially when the offers rolling in from credit card companies look so great on paper. These companies are notorious for offering an introductory interest rate to new business owners that skyrockets to an unaffordable rate after just a few months.

Be sure to read all the fine print before acting on a credit card offer, and seek help from a third party advisor if there are terms or conditions you don’t fully understand. Not all business credit cards are created equal—so if you do decide to go the credit card financing route, you’ll want to do some serious comparison shopping to make sure you’re getting the best long term deal.

3. When You Know You Can Pay On Time

This is perhaps the biggest challenge to credit card financing for a young entrepreneur—because when your business is just getting started in establishing credit, even one late credit card payment can tank your business credit rating. In some cases, businesses that are late or default on credit card payments are automatically reported to the BBB.

Such challenges can seriously impact your business’s ability to attain a business loan for greater growth in the future, and completely stagnate your company’s long-term potential. Those kinds of consequences just aren’t worth the benefits of a business credit card, so don’t put yourself in a risky situation if you’re not 100% confident in your ability to pay on time.

4. When You Understand the Risks

Some new business owners falsely believe that using a business credit card will cushion their personal finances from the risks of business debt, but that simply isn’t true. As the business owner, you will still be held personally liable for credit card debt, regardless of whether the card is for personal or business use.

Because of this personal liability, the use of credit card financing dramatically increases your pressure as a business owner to succeed, which can only heighten your stress.

In fact, a study by the Ewing Marion Kauffman Foundation found that for every $1,000 in credit card debt that a new business takes on, its chances of long-term survival fall by more than 2 percent. Those are big risks and must be taken into account as you consider credit card financing for your small business.

5. When You Want to Retain Maximum Equity

If you’re extremely confident in the value of your business idea, you may not want to bring in outside investors because you don’t want to hand over equity in your business. This reasoning is extremely risky, because you’re the only person liable for the debt if your business fails. But if you have a solid reason to believe that the profits on equity saved would be significantly higher than the interest payments that a business credit card will cost, you might consider the risk to be worth the potential reward.

6. When You Need Help with Short-Term Cash Flow

Occasionally entrepreneurs encounter a situation in which they don’t quite need a long-term loan, but they struggle maintaining enough cash on hand to deal with day-to-day operational expenses. This is especially true of seasonal businesses, as well as those that are service (rather than point-of-sale) based. The time it takes to invoice a client and receive payment for services rendered creates a situation where you know the money is coming, but you just don’t have it right now.

In these cases, credit cards can help with short-term cash flow because they provide a cushion of up to 55 days from the time you make a purchase until a payment is due. But even so, you still can’t spend more than is coming in, and those high interest rates on business credit cards can quickly eat into your profits.

7. When You Want to Simplify Business Finances

If you’re streamlining finances between business partners and perhaps a couple of employees, all while attempting to keep business and personal finances separate—keeping track of expenses can get complicated quickly.

Some business owners find that putting all transactions on one credit card makes it easier to keep track of overhead. This can also come in handy when tax season rolls around, as you’ll need only a copy of your credit card statements to show your total loss for the year. This makes it much easier to calculate your taxable income and other details that can be a nightmare when expenses are separated between multiple accounts.

8. When You’re Looking to Improve Your Credit Rating

When managed effectively, credit cards can help young businesses improve their credit score. One of the hardest obstacles for brand new businesses when seeking loans is their lack of credit history. Starting with a business credit card gives you the opportunity to prove your ability to manage and repay debt for your business on a smaller scale, giving lenders more confidence in your ability to repay a larger loan.

But there is a caveat here: you must always pay your credit cards on time! Even one late payment can tank your credit rating and completely undermine your goal of establishing good credit. If you are not completely confident in your cash flow situation and ability to consistently pay off your business credit card, it won’t be an effective method of improving your credit rating.

9. When the Benefits Outweigh the Cost

As with any form of debt-based financing, credit cards carry costs and benefits that require serious consideration. If you’ve weighed the pros and cons, calculated the impact of interest rates on your bottom line, and are confident in your ability to make payments, credit card financing does have the potential to help your business grow. And special rewards like airline miles or discounted gas—while they shouldn’t be a deciding factor—can be a nice perk of responsible credit card use.

Ultimately, choosing to finance your small business with credit cards is a matter of whether the benefits outweigh the cost. That is a question only you can answer for your particular situation, but these considerations should give you a starting point for your decision-making process.

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Meredith Wood is the Editor-in-Chief at Fundera, an online marketplace for small business loans that matches business owners with the best funding providers for their business. Prior to Fundera, Meredith was the CCO at Funding Gates. Meredith is a resident Finance Advisor on American Express OPEN Forum and an avid business writer. Her advice consistently appears on such sites as Yahoo!, Fox Business, Amex OPEN, AllBusiness, and many more.