Using a Credit Card To Finance Your Small Business

Woman holds credit card, looks at laptop
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One source of financing for small business owners is to fund the business by using a credit card, which may be appealing to new business owners and entrepreneurs who are limited in the sources of funding available to them.

A business owner might turn to credit card financing in order to open the doors of the business, or use it later in the life of the business for operating expenses. Funding a business with a credit card is a legitimate source of business financing, and can be a viable option if you have a high credit limit, a reasonable interest rate, and if the card offers you rewards when used. However, credit card financing may not always be the most desirable alternative, so it's important to learn what it entails and weigh its pros and cons.

A Startup Has No Credit of Its Own

Even business startups are using credit card financing to get their businesses off the ground. Business startup owners may have personal credit, but the business is new so it has no business credit. If the owners have good personal credit, they usually have access to personal credit cards. which they may use to fund business startup costs.

The U.S. Small Business Administration (SBA) reports that 46% of all small business owners use personal credit cards at some point to start and/or operate their businesses.

If you use personal credit cards to finance your startup business, you are personally liable for any debt you incur. Using a personal credit card for financing a startup business means taking on a significant amount of risk although there are some rewards.

There are other options besides taking on personal debt financing. If your startup is anticipated to be a high-growth business, you may be able to get venture capital or attract an angel investor for startup financing. Bank loans and lines of credit are unlikely for a startup since they do not yet have business credit.

Pros and Cons of Using a Credit Card to Fund Your Startup

Pros
  • Lower interest rates

  • Don't lose any equity

  • Usually no balance transfer fees

  • Revolving credit

  • Rewards programs

  • Used to manage cash flow

Cons
  • Easy to abuse

  • May not have a high enough debt limit

  • Can be locked out of other types of credit

Pros Explained

Lower Interest Rates

Credit cards may have lower interest rates than some types of financing. According to a recent survey by U.S. News and World Report, the average annual percentage rate (APR) for all credit cards in their database is 15.56% to 22.87%. If you separate business credit cards, the rates are very similar at 14.22% to 22.19%. Sources of business financing such as asset-based lending usually have higher interest rates than credit cards.

Don't Lose Any Equity

You don't lose any equity in the business since the debt is all yours. Credit card debt is one type of debt financing. Whether you use a business or a personal credit card, you incur debt, which is a liability. When financing a business, if you use debt financing, you don't sell stock in your business, and you don't give up any ownership equity.

No Balance Transfer Fees

Usually, there are no balance transfer fees. If you have to pay your startup costs with a personal credit card, you can usually transfer that balance to a business credit card once your business is established. This is advisable since you should keep your personal and business transactions separate for tax purposes.

Revolving Credit

You have revolving credit that you can reuse when it is paid off. With either a business or a personal credit card, once you pay off debt, you can use it since it is revolving credit.

Rewards Programs

Credit cards have rewards programs available to the owner. You may be able to earn points toward other purchases, cash back, or airline miles by using the card. All of these could benefit your business.

Used to Manage Cash Flow

Credit cards can be used to manage cash flow. If you get a credit card that keeps track of your spending, possibly in categories, it can be used to keep an eye on your cash flow.

Cons Explained

Easy to Abuse

Credit cards are easy to abuse by running up high balances and missing payments, which have financial consequences. They are only an acceptable form of financing a business if you are a responsible cardholder. If you miss payments or go over your credit limit, you will incur high fees and actually cost your business money.

May Not Have a High Enough Debt Limit

You may not have a high enough debt limit to include your personal needs if you use a personal credit card for business. If you are considering using a personal credit card for business needs, be sure it has a high credit limit. You could have a personal emergency and need it for immediate use.

Can Be Locked Out of Other Types of Credit

If your balance is too high, you could be locked out from other types of credit. After paying your startup costs with a credit card, you could find that you or your business has incurred too much debt to qualify for other forms of business financing as your business continues to operate.

Alternatives To Credit Card Funding

It is normally a challenge to find financing for a startup business. Credit cards, though, are not the only answer, and usually not the best. There are other options to consider before taking this route.

Personal Wealth

Individuals often save money for a long time in order to bring their business idea to life. If you can use your personal savings, or a portion of it, to open your business, you will likely earn a higher return on the money than if you leave it in a bank.

Funds From Family and Friends

Your family and friends may be excited about your business idea and want to contribute. They may supply startup capital in the form of low-interest loans. They could also ask you if you would be willing to share the ownership of the business with them if they contribute. Some may even gift you funds.

Funds Based on Your Personal Assets

A home is usually the largest asset most people own. If you own a home and have built up some equity in it, you may be able to use that equity in one of several ways to raise startup capital:

  • Refinancing: You may be able to refinance your home and draw some equity out of it to start your business.
  • Home equity loan: A home equity loan is a second mortgage. You have to go through a similar application procedure as you did for your first mortgage. You make monthly payments to repay this loan, but it is a valuable source of startup capital.
  • Home equity line of credit (HELOC): A home equity line of credit simply taps your home equity and allows you to borrow money against it. When you have repaid the borrowed money, you can reuse the line of credit.

Small Business Administration Loans and Grants

The SBA offers both loan and grant programs to small businesses. The agency does not loan money directly, but it provides guarantees to lenders who make the loans. Two types of possible loans are the SBA 7(a) loan and the SBA Microloan.

In order to find a lender who you could work with and who works with the SBA, use the SBA's Lender Match Tool.

The SBA also offers a limited number of grants to specific industries.

Crowdfunding

Crowdfunding is the process of raising funds from the public for startup capital for your business. It has become a more prominent source of fundraising and is generally accomplished by using one of the internet crowdfunding platforms. It is especially useful for early-stage funding for your business.

Venture Capital and Angel Investors

If you anticipate that your business will be a high-growth and high earnings startup, then you might want to explore obtaining VC money. Venture capitalists provide you with funding if they are interested in your project. They also require some percentage of the ownership of the firm. After a business has been launched, those financed by VCs are typically taken public.

Angel investors are high net-worth individuals who take an interest in a startup company. They offer money and often help and advice. Angel investors sometimes require a stake in the ownership of the company along with the rate of return they earn on their money.

How To Use Credit Card Financing Carefully

Having high credit card debt, without the means to repay it, can affect both your professional and personal life. If you use a credit card to finance a business startup, the assumption is that you are reasonably sure your business will be a success and generate enough cash flow to allow you to pay your debt. In the interim, it is vitally important that you use credit card financing wisely.

  • Read the terms and agreements that come with the credit card. Know what you are getting into. Read the agreements that come with your card carefully. If something doesn't fit your circumstances, send the credit card back. If you have questions, ask.
  • Make your payments on time. Even one late payment remains on your credit report for years. Set up autopay either with the credit card company or your bank to make sure payments are made on time.
  • Make more than the minimum payment. If you just make the minimum payment, it will take years to pay off the credit card. Try to make more than the minimum payment each month.
  • Negotiate a lower interest rate. If you establish a good payment history with the credit card company, you may eventually be able to negotiate a lower interest rate on your card which will allow you to pay it off quicker.
  • Never go over your credit limit. If you go over your credit limit, the credit card company may raise your interest rate.
  • Make sure your monthly statement is accurate. In today's world where fraud is an everyday occurrence, check your statement every month to be sure of its accuracy.
  • Pay off credit card debt as quickly as possible. As your business grows, you may be able to pay off your credit card debt by refinancing it with a traditional business bank loan.

If a credit card company sees that your balance is creeping up, they may reduce your credit limit. Be sure you are aware of your credit limit so you don't exceed it.

The Bottom Line

Using personal credit card financing certainly isn’t the best way to finance your new startup business. If it is the only way, there are techniques you can use to make it work if you are careful. There are both pros and cons to using credit card financing, but the best advice is to replace it with more traditional business financing as soon as you can. While you have credit card debt, be very careful and follow the terms and conditions of the card.

Tap into one of the alternative sources for financing a small business as soon as it is feasible. By doing this, you can have more ability to pay off the credit card debt.