Startup financing might seem like tricky business, requiring stressful meetings with potential investors or filling out page after page of loan applications. Some entrepreneurs trying to bootstrap their startup turn to an easy alternative—business credit cards. But is that a good or bad idea? As with so many things in the startup world, it depends.
Why You Should Use a Credit Card to Fund Your Startup
Whether it’s your personal credit card or a business credit card, that credit card comes with some definite benefits if you’re using it to finance your startup.
1. It’s Easy
If you already have a personal credit card with available credit, you’re all set. Credit is immediately available with no work on your part—it doesn’t get any easier than that!
2. Convenience of Revolving Credit
Like a line of credit, a credit card is revolving credit. This means you can borrow up to your credit card limit, pay your balance off—or down, at least—and borrow again. That is, as long as you make your payments on time, your balance remains under your credit card limit, and your account is in good standing. And you don’t need to reapply each time you need more money, the way you would with a business loan.
3. Keep Equity in Your Startup
You retain your equity. No need to offer shares in your business to bring on outside investors who’ll get a slice of the pie in exchange for their investment dollars. When financing your business with a credit card, you can keep your full ownership position.
4. Competitive Rates (Maybe)
If you have a low interest rate credit card—like 12.99%—your borrowing rate might actually be lower than that charged by some online business loan rates. Even better, you could find and qualify for a 0% time-limited introductory offer credit card. If so, you could finance your business without being charged interest for several months, or even up to a year. Just make sure to read the fine print of these 0% offers carefully!
5. Hit the Rewards Bonanza
If you already have a rewards card and you start using it for startup purchases, you’ll soon be racking up rewards like crazy. If you’re still just considering using a business credit card in place of a loan, take a look at some of the business credit cards rewards programs out there—you might be surprised.
6. No Collateral Needed
Another reason startup founders might use a credit card: they don’t need collateral for a credit card. And when you’re launching a startup, collateral can be hard to come by.
7. Easily Track Startup Funding Expenses
If you’re using a business credit card, buying everything on the card is a simple way to track your startup funding expenses. This helps simplify bookkeeping and save time—and money—on accounting come tax time.
8. Establish Good Business Credit
Getting a business credit card to fund a startup is one way to establish business credit and separate your personal and business expenses. You can then use the card as a step to applying for other business loans that offer lower rates.
Why You Shouldn’t Use a Credit Card to Fund Your Startup
Though convenient, using a personal or business credit card to bootstrap your startup is a risky move for several reasons—and they’re serious ones that can have long-term financial consequences.
1. Unlimited Liability
Whether you’re using your personal credit card or a business credit card, if credit cards are your main form of financing and your business goes belly-up, guess who’s held responsible for all of the charges?
After all, credit cards generally require a personal guarantee, which means your credit card company has the right to recover your entire credit card balance. So they can go after any or all of your personal assets to get their money—your home, personal savings accounts, even your kid’s college fund. In a nutshell, if you finance your business with credit cards and it flops, you could lose a lot more than your business.
2. Co-Mingled Expenses Bad for Personal Credit
Using a personal credit card for personal and startup expenses leads to a tangled mess of transactions. There’s no distinction between business and personal finances: that’s a bad thing. If you run into cash flow issues trying to get your startup off the ground and you start missing payments, you could damage your personal credit score—and that might hurt your chances of getting approved for both personal credit (like a mortgage) or further business credit (like an expansion loan).
3. Credit Cards Have Relatively Low Limits
If you’re financing your startup from personal or business credit cards only, you’ll be constrained by your credit card limits. Generally the highest credit card limits won’t be greater than $50,000, while small business loans can reach into the millions. Your startup expansion plans might exceed your startup financing.
4. Expensive in the Long-Term
Even if you get one of those time-limited 0% credit card offers mentioned above, what rate will you pay when the offer ends? Credit cards don’t usually wind up the cheapest way to finance a startup.
While a low-rate card might have you paying just under 13% in interest, many credit card rates are closer to 20%—an expensive burden to shoulder when you’re first starting out. If you have good credit and a solid business plan, consider applying for a cheaper online business loan to fund your startup.
With 8 reasons to use a credit card to fund your startup and 4 big reasons not to, only you can decide which options best suits your situation. But before you do, take a look at your other startup financing options, like credit lines or startup loans from an online alternative funding company. It’s fast, easy, and worth a shot to get your startup launched on the right financial foot.
The post Financing Your Startup With a Credit Card: Good or Bad Idea? appeared first on Fundera Ledger.
from Fundera Ledger https://www.fundera.com/blog/2016/04/13/financing-startup-with-credit-card/