Business

Using Credit Cards to Finance Your Startup: 5 Things You Should Know

Let’s just start by acknowledging the white elephant in the room: credit cards are obviously not the ideal means of financing a business startup. That said, you may have to get creative if you’re having trouble coming up with capital the traditional way, which is to say via lenders, investors, business partners, and so on.

And if you’ve already got interested buyers lined up and you need to launch your enterprise without delay, you can find ways to use credit cards responsibly as a means of getting your business off the ground. Of course, this does require you to have a plan in place to pay off or transfer the debt following startup. And there are a few things you need to know going in so you aren’t surprised. Here are some considerations that should be on your radar when you decide to use credit cards to finance your business.

  • The size of your startup is important. We all know interest rates are going to be higher when you use a credit card as opposed to, say, a bank loan. But even more important to understand is that credit cards use compound interest, further increasing what you’ll end up owing if you can’t pay in full. This is a dicey game to play when you’re starting a business, not knowing what kind of money you’ll make.
  • And the size of your startup could play a role in your decision. If, for example, you’ve decided to operate a service-oriented, home-based business, your startup costs may be relatively small, say a few thousand dollars for equipment, website design, and so on. But if you’re opening a manufacturing business complete with warehouses, supply chains, and more, racking up tens or hundreds of thousands of dollars in credit card debt along the way, you should probably rethink your strategy.
  • It can impact your personal credit score. Once you’ve set up an LLC, S-corp, or some other type of business entity, you may be able to secure business credit cards. But you might not have much credit in your business name until after you’ve launched it. And this means using your personal credit to get your company off the ground.
  • The consequence of carrying major credit card debt, though, is that it can negatively impact your credit score. And should you miss payments or even go bankrupt, your personal financial recovery will be long and painful.
    • Fine print matters. You really need to understand the worst possible scenario that could occur when you finance your startup with credit cards. And this means reading the fine print of your credit card agreements. For example, interest rates may increase (possibly double or more) if you are late or miss a payment.
    • And there will almost certainly be policies concerning credit reporting, collections, and so on. Although you no doubt intend to make payments in a timely manner, you need to be aware of what will happen if you are unable to.
    • Transfer balances as soon as possible. This is a major must. If the loan or investment process is holding you up and you’re chomping at the bit, credit cards could provide an excellent interim solution. But you should really only go for it if other forms of financing are a sure thing, or if you have contracts in place for work that will help you to pay down debt quickly. You don’t want to find yourself saddled with major credit card debt months or years down the line, with the tally increasing monthly.
    • Creditors can come after you. There’s a reason why financing your startup with credit cards needs to be carefully considered: you stand to lose a lot if you fail. When you use credit cards you put your personal credit on the line. And creditors will not only dismantle your business to get the money they’re owed; they’ll also come after your personal assets. So you really need to weigh the risks versus rewards and make a solid plan before you go this route.
    • [“source-businessmerch”]

     

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