There have been plenty of success stories of people financing large ventures purely from plastic credit cards. Guitar Hero, Google, and Kevin Smith’s first movie “Clerks” are just a few. However, many more people have found themselves in bankruptcy court while also paired with an irreparable credit score. It can be very high risk, high reward, so you should be prepared before accumulating credit balances to start up your new business.
- Availability. Since the 2008 financial crisis, lenders have been backing off, making it even harder to find the capital to finance a startup. If you report a high enough income, you might just have a high enough limit to get your business going.
- Take credit as you need it. Whereas you will likely be paying back the interest of a business loan before you are even able to spend it all, financing with credit cards allows you to only pay interest on the essential items you need to run your business.
- Financial freedom. If using credit cards, you don’t have to justify every business expense to a consultant, investor, or shareholder. This might make the business process much less tedious.
- Business rewards. This applies only if you have a business credit card, as opposed to a consumer card. Many business cards give nice cashback for office supplies and the like as well as frequent flyer rewards.
- Simplifies tax issues. Again, this applies only to business credit cards. Having a separate credit card for your business purchases make filing taxes less of an issue. I wouldn’t advise financing a business with the same card you use for personal expenses.
- Availability of funds. While I mentioned earlier that credit cards may get you financing power where business loans were denied, you must also keep in mind that creditors have also seriously limited credit lines as well since the financial crisis. Unless you have an amazing credit history, you might not be able to get enough in credit cards to finance a business.
- Sink or swim. When financing your business through credit cards, you are just about on your own. You will receive little oversight, and for many people, this could lead straight to a business failure. This is why it’s best to consult your business idea with many people before sacrificing your own debt, making the financial freedom advantage above somewhat moot.
- Harsh consequences for failure. Failing any business is never a good thing, but failing a business primarily funded from credit cards is credit history murder. You will lose your savings, be under a huge pile of debt, and paying out interest for the rest of your life.
- Limit cutoffs. It can often take time for a business venture to finally start bringing in capital, and there is a good chance that you may run up such a large balance on your card for a long enough time that your issuer will lower your credit limits. This could happen at a time where you need it the most.
All things considered, financing a business primarily from credit cards should be avoided as much as possible. You should look for other methods of financing including loans, credit lines, or even peer-to-peer lending.
Ideally, business credit cards should be used as a means to pay unexpected business expenses like broken equipment, unexpected travel, and last-minute client dinners that might seriously impede your cash-flow. These are smaller business investments that would be easier to pay off over time than an entire start-up cost.
If you see no other alternative to finance your business, be incredibly meticulous. You will have to find a way to eventually pay these balances in addition to the interest they accrue. Having a detailed payment plan for your business credit cards (before you realize that you are having trouble paying them off) is a must. You must scrutinize how much you can afford to spend as well as form where and when your payment money will come.
This is a guest post by Eliza Morgan who is a full time blogger. She specializes in writing about business credit cards. You can reach her at email@example.com.