Using credit cards to fund your business offers both benefits and risks. Credit cards can be easier to obtain than other forms of credit—especially for a start-up or new business. If used responsibly, credit cards can be a useful funding source, but credit cards usually carry higher rates of interest than other forms of financing. Accumulated credit card debt can be burdensome and risky to a business if not managed well.
Credit cards can be a way for owners of new businesses to gain funding before they have built up a good business credit score or have enough longevity to qualify for more conventional funding, such as bank loans. A Clutch survey of business owners found 13% of owners used credit cards to fund their start-ups and 18% used them as an additional source of business funding after three months.
The benefits to using credit cards to fund your business include:
You have access to money right away. You don’t need to wait for a loan or line of credit to be approved. This can be useful for unexpected business expenses.
Many credit cards offer flexible repayment options.
Credit cards are convenient if you make frequent purchases for your business or use them to pay bills.
Credit cards don’t require collateral, unlike some other forms of financing.
You can use business credit cards to build a company credit history—provided credit is used responsibly and debt doesn’t build up. This will make it easier to obtain additional funding in the future.
Many credit card companies offer low or zero interest grace periods. Having no finance fees for a year can really help a business, especially a new one. Some card companies offer no-fee and no-or-low interest balance transfers of existing debt.
Many credit cards offer reward programs, such as cash back, airline miles, discounts from retail partners or extended warranty protection. These programs may help reduce your business costs.
You don’t have to share equity with investors and can keep full control of your business.
Business related interest from credit card debt can be tax deductible.
The drawbacks to using credit cards to fund your business revolve around higher interest rates, the too-easy convenience of using cards and the risk that debt will accumulate and become unmanageable, putting your business—and you—at risk.
The potential downsides or risks to using credit cards to fund your business include:
Business credit cards have lower credit limits than other forms of financing.
Credit card companies charge high interest rates. If you carry an unpaid balance month to month, these charges can add up and make credit cards an expensive form of business financing.
Relying on credit cards to pay business costs can lead to accumulated debt. This debt may be hard to pay off if a company isn’t generating enough revenue, especially at the beginning.
If a business has high levels of credit debt, other lenders may be unwilling to offer additional credit.
If a business is using a high percentage of its available credit limit, this can make it difficult to obtain other forms of funding and negatively impact the credit score of both the company and the owner.
Business and personal finances can merge, which may lead to issues with taxes and credit ratings.
If credit card debt becomes unmanageable, card issuers will charge late fees and penalties, which can negatively impact both your business and personal credit scores. If your business defaults on the debt, both the company and you may face legal action or bankruptcy.
It’s important to carefully consider both the advantages and drawbacks before you rely on credit cards as a financing strategy for your business. While they can help your business, especially in the beginning, it’s a good idea to explore other funding options as your business becomes established. This ensures you get business capital while minimizing risk as your company grows.
Sources:
Business News Daily: Should You Finance Your Start-up with a Credit Card: http://bit.ly/3SWv43Z
Clutch Consulting: Start-up funding sources for new businesses: https://bit.ly/3kVPYn9
Faster Capital: The pros and cons of using credit cards to finance your start-up: http://bit.ly/3YshUfZ
