Is financing in the cards for your startup?
Sergey Brin and Larry Page famously funded their Google startup using credit cards, and according to the Small Business Association, most entrepreneurs (who start a business with less than five employees) initially use plastic as their main source of financing.
You’ll likely receive a flurry of business credit card applications soon after you set up your venture. But while establishing your business as an LLC, S-Corp or C-Corp technically separates your business debt from your personal debt, it’s important to note that this logic doesn’t work when applying for a business credit card. Since your new business doesn’t have a credit history, you’ll be approved based on your personal credit, which makes you personally responsible for paying any debt incurred on the card, according to U.S. News & World Report.
If you’re thinking about using credit cards to finance your startup, read these pros and cons first:
- Convenience: According to Creditcards.com, credit cards can help you extend your cash in the short term and offer a convenient way to monitor and keep track of your business expenses for tax purposes.
- Autonomy: Financing your startup with credit cards can give you control over your business —friends, families or partners may expect an equity percentage in exchange for their backing or may question your purchases and decisions.
- Speed: It’s often faster to get approval for a new credit card — and get your business off the ground — than it is to secure a line of credit or loan from a financial institution.
- Credit building: You can begin to build good business credit if you at least pay the minimum amount on your credit card each month on time, according to Investopedia.com. For more on credit scores, check out our 9 answers to your most pressing credit score conundrums.
- Rewards: Many credit cards can offer you extra perks like cash back, airline miles and merchandise, which can be very useful for startups.
- Liability: As noted by U.S. News & World Report, when you use credit cards to fund a new venture, the lines between your personal and business credit blur. In the event of a business failure, debt collectors may be able to come after both your company and personal assets.
- Credit damage: If you can’t pay your credit card debt in a timely manner, you will likely damage your personal credit history and credit score as a result. For details, view our 5-part credit video series.
- Low limits: Credit cards often offer a lower credit limit than secured loans from a financial institution, which may not meet your business needs. Your card issuer may also get nervous and decide to lower your credit limit further if you consistently run up high bills each month, according to CardRatings.com.
- High costs: CreditCardNetwork.com notes that credit cards typically include higher fees and a higher interest rate than a conventional business loan from a bank. Unless you can pay the full credit card bill each month on time, you risk accumulating late fees and finance charges that can dramatically increase your debt.
- Overspending: Credit cards may make it easy to keep spending, as you’re not accountable to anyone until you can’t make a minimum payment on time. YourSmartMoneyMoves.com recommends considering other options if you’ve had trouble with credit cards in the past.
Many successful business owners have balanced these pros and cons when cash is short — confident they can pay off the balances. If you do decide to go the credit card route for financing, CardRatings.com recommends shopping around for the best rates and fee structure. Balance transfer credit cards (available with low or zero annual percentage rates) are suggested for entrepreneurs who already have credit card debt, if they can qualify.