One of the sources of financing for small business owners is using a credit card to fund their business which may attract new business owners and entrepreneurs with limited sources of funding available.

Business owners may turn to credit card financing to open the doors of the business or use it later in the business life cycle to cover operating expenses. Funding a business with a credit card is a legitimate source of business financing and may be a viable option if you have high credit Limit reasonable interest rates if the card offers you a bonus when you use it. However credit card financing may not always be the best option so it’s important to understand what it means and weigh its pros and cons.

A Startup Has No Credit of Its Own

Even startups are using credit card financing to start their business. The owner of a startup may have personal credit but the business is new so it has no business credit. If the owner has good personal credit they can usually use a personal credit card. them Can be used to finance business start-up costs.

The U.S Small Business Administration (SBA) reports that 46% of small business owners use a personal credit card at some point to start and/or operate their business. 1

If you use a personal credit card to finance your start-up you are personally responsible for any debts you incur. Using a personal credit card to finance a startup means taking on a lot of risk albeit with some reward.

There are other options besides taking on personal debt financing. If your startup is expected to be a high-growth business you may be able to secure venture capital or attract angel investors for startup financing. Bank loans and lines of credit are unlikely for startups because they haven’t Have commercial credit.

The Pros and Cons of Funding Your Startup with a Credit Card

Advantages Lower interest rates Don’t lose any equity Usually no balance transfer fees

Pros Explained

Lower Interest Rates

Interest rates on credit cards may be lower than some types of financing. According to a recent survey by U.S News & World Report the average annual interest rate (APR) for all credit cards in its database ranges from 15.56% to 22.87% If you split your business credit cards the rates are very similar 14.22% to 22.19% 2 Commercial financing sources such as asset-based loans typically have higher interest rates than credit cards.

Don’t Lose Any Equity

You won’t lose any equity in the business because the debt is all yours. Credit card debt is a type of debt financing. Whether you use a business or personal credit card you incur debt which is a liability. When financing a business you don’t sell your stock if you use debt financing business and you will not waive any ownership interest.

No Balance Transfer Fees

There are usually no balance transfer fees. If you must pay the start-up fee with a personal credit card you can usually transfer the balance to a business credit card after the business is established. This is desirable because you should separate personal and business transactions for tax purposes.

Revolving Credit

You have a revolving credit that can be reused when it is paid off. Once you’ve paid off your debt whether it’s a business or personal credit card you can use it because it’s a revolving credit.

Rewards Programs

Credit cards have rewards programs available to owners. You can use the card to earn points for cash back or airline miles on other purchases. All of these can benefit your business.

Used to Manage Cash Flow

Credit cards can be used to manage cash flow. If you get a credit card that can track your spending it might be used in a category to keep an eye on your cash flow.

Cons Explained

Easy to Abuse

Credit cards are easy to abuse because of the financial consequences of high balances and delinquency. They are only an acceptable form of business financing if you are a responsible cardholder. If you miss a payment or exceed your credit limit you will incur high charges in fact Spend your business money.

May Not Have a High Enough Debt Limit

If you use a personal credit card for business you may not have a high enough debt limit to meet your personal needs. If you’re considering a personal credit card for business needs make sure it has a high credit limit. You may have a personal emergency and need immediate use.

Other types of credit can be locked

If your balance is too high you may not be able to get other types of lines of credit. After paying your start-up costs with a credit card you may find that you or your business has taken on so much debt that it doesn’t qualify for other forms of business financing as your business continues to operate.

Alternatives To Credit Card Funding

Finding financing for a startup is often a challenge. Credit cards while not the only answer are usually not the best either. There are other options to consider before taking this route.

Personal Wealth

Individuals often save money for the long term in order to bring their business ideas to life. If you can use your personal savings or a portion of it to start a business you’re likely to get better returns than if you kept it in the bank.

Funds From Family and Friends

Your family and friends may be excited about your business idea and want to contribute. They may provide start-up capital in the form of a low-interest loan. They can also ask you if you would like to share ownership of the business with them if they contribute. Some might even give you gifts funds.

Funds Based on Your Personal Assets

Homes are often the biggest asset most people own. If you own a home and have built some equity in it you can use that equity to raise start-up capital in one of several ways:

  • Refinancing: You can refinance your home and take 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 process to your first mortgage. You make monthly payments to repay this loan but it’s a valuable source of start-up capital.
  • Home Equity Line of Credit (HELOC): A home equity line of credit simply uses your home equity and allows you to borrow money. After you repay the loan you can reuse the line of credit.

Small Business Administration Loans and Grants

SBA offers loan and grant programs for small businesses. The agency does not lend directly but provides guarantees to lenders that provide loans. 3 The two possible loans are SBA 7(a) loans and SBA microloans.

To find lenders who can work with you and with SBA use SBA’s Lender Matching Tool.

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

Crowdfunding

Crowdfunding is the process of raising money from the public to raise money for your business. It has become a more important source of fundraising usually by using one of the internet crowdfunding platforms. It is especially useful for your early financing Business.

Venture Capital and Angel Investors

If you anticipate your business will be a high-growth and high-yield startup you may want to explore funding from venture capital. If venture capitalists are interested in your project they will fund you. They also require a certain percentage of company ownership. after Businesses funded by VCs usually go public.

Angel investors are high net worth individuals interested in startups. They offer money and often help and advice. Angel investors sometimes need a stake in a company’s ownership and the rate of return they receive on their funds.

How to Use Credit Card Financing Carefully

Having high credit card debt that you cannot pay can affect your professional and personal life. If you use a credit card to finance a startup assume you have reason to believe that your business will be successful and generate enough cash flow to cover your expenses debt. During this time it is crucial to use your credit card financing wisely.

  • Read the terms and agreements that came with the credit card. Know what you are doing. Carefully read the agreement that came with the card. If something doesn’t work for you return the credit card. If you have questions ask.
  • Pay on time. Even one late payment can remain on your credit report for years. Set up automatic transfers with your credit card company or your bank to ensure payments are made on time.
  • Pay more than the minimum payment amount. If you only make the minimum payment it will take years to pay off your credit card. Try to pay more than the minimum payment each month.
  • Negotiate lower interest rates. If you have established a good payment history with your credit card company you may eventually be able to negotiate a lower credit card interest rate that will allow you to pay off faster.
  • Never exceed your credit limit. If you exceed your credit limit the credit card company may increase your interest rate.
  • Make sure your monthly statement is accurate. In today’s world where fraud occurs every day check your statements monthly to ensure their accuracy.
  • Pay off your credit card debt as quickly as possible. As your business grows you can pay off your credit card debt by refinancing a traditional business bank loan.

If the credit card company sees your balance climbing they may lower your credit limit. Make sure you know your credit limit so you don’t exceed it.

The Bottom Line

Financing with a personal credit card is certainly not the best way to finance your new startup. If that’s the only way there are a few techniques you can use to make it work if you’re careful. There are pros and cons to using credit card financing but the best advice is to replace it More traditional business financing soon. When you have credit card debt be careful and follow the terms and conditions of your credit card.

Utilize one of the alternative sources of financing your small business as soon as feasible. By doing this you can have more power to pay off your credit card debt.