Should you start your business with a credit card?

Should you start your business with a credit card?

Victoria Pappas
 | 

So you have decided to start a business? You are probably itching to start on the fun stuff like working on designs, logo, and branding. But one very important factor to consider is how you are going to pay for all the costs associated with starting a business. 

 

Start up costs for new businesses can be expensive, so you may not necessarily have all the cash you need. But is it a good idea to use a credit card to start your business? Here are some tips, the pros, and the cons for using a credit card to start your business. 

 

Figure out your exact start up costs

 

If your expected start costs are going to be $50,000 or less, and you cannot qualify for a bank loan, a credit card might be an option for you. Certain cards come with rewards relating to business purchases that can benefit you as well. 

 

When using a small business credit card, new, small businesses will typically get around $20,000 in approval and often will get even less than $10,000. The limit can increase when the business’s revenue increases, however a new business might not see a significant increase in revenue for a while. 

 

If you expect your start up costs to be larger than what you can get approved for on a small business credit card, it is a good idea to look into other options such as a bank loan or other methods of borrowing. 

 

Consider other options first

 

Credit cards are not the only option when it comes to financing your new business. But beware, these methods also come with certain advantages and disadvantages, and may not be right for you. 

  • Personal savings or borrowing money from family and friends
  • Bank Loans
  • Sell equity or use collateral
  • Tapping into a 401(k) or IRA account
  • Crowdfunding

You need more flexibility 

 

Using a credit card to start your business allows for greater flexibility than a bank loan. You can use the funds for what you want and when you want. 

 

Loans tend to be stricter with payment schedules and if you need more money you might have to go through the application process again. 

Using a credit card allows you greater flexibility with payments. 

 

The pros of using a credit card to start your business 

  • It can be easier to get over other forms of funding, if you have good credit. The application process can be relatively easy compared to getting a loan or selling personal assets. 
  • They offer rewards. A lot of cards offer cash back or other forms of points and benefits when you use the card and if you make the payments on time. 
  • Some cards offer low or zero interest rates for the first year and other introductory benefits. 
  • Payments are not due right away. If you purchase items at the beginning of the credit cycle, you usually have about 30 days if not more before the balance becomes due. So, if you don't have the funds available right away, you have a couple weeks to pay the statement off. But be careful not to pay the bill late since fees and interest can accrue. 
  • You can easily keep track of expenses. If you are starting a business, you might not have an employee or team dedicated to keeping track of all the money. Your credit card statements and accounts provide a monthly overview of your purchases, giving you an easy way to track everything. Additionally most credit card companies have apps and other online accounts tracking all purchases and allowing you to add alerts that can be helpful.  

The cons of using a credit card to start your business 

  • You could max out the amount on the card. As mentioned above, credit cards are not a good idea if you need more than about $30,000 to $50,000 to start your business as credit cards place limits on the amount you can spend each month. Expenses can add up very quickly and a credit card might not be equipped to handle all those expenses. 
  • You can be personally liable if your business fails. In the unfortunate event that your business is not successful, all the debt from business expenses will be your personal responsibility and you can be taken to court if that amount does not get paid off. 
  • Long term expenses put on a credit card can become very expensive. Credit cards can have high annual percentage rates. The average annual percentage rate on credit cards is 16.73%, which can be double what you pay in interest on a small business loan. Once the zero percent rate expires, you will be charged interest on outstanding balances and late fees will accrue. If you can pay your balance off on time every month this should not be an issue. But things happen and it is something to be wary of. 
  • Unauthorized transactions can happen easily. If you give the card to another employee, they can easily make unauthorized purchases on the card. 
  • Your credit score can be affected. If your business is not doing well and you cannot make payments on time, then your credit score may worsen. This will affect your ability to get another credit card, for personal or business use. It can even affect your ability to buy or rent a home, get a loan, or other services that require a credit check.  
 

This article is intended to convey generally useful information only and does not constitute legal advice. Any opinions expressed are solely those of the author, not LawChamps.

 
Victoria Pappas

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