Using a Credit Card To Finance Your Small Business

Tolu Gabriel
Tolu Gabriel December 28, 2021
Updated 2021/12/29 at 4:13 AM
Using a Credit Card To Finance Your Small Business

For startups founders struggling to find their feet with the required funding for their businesses, they can consider using credit cards.

A business owner might want to finance their business with credit cards to get it on the shore or probably after a few years of operation as a viable option if you have a high credit limit, a reasonable interest rate, and if you’ll get rewards from using the card.

However, you need to weigh your options properly before deciding to use a credit card for a startup. Here are things to consider when using a credit card to finance your small business.


A Startup Has No Credit of Its Own

Startups have no credit of their own, no business credit. But the owner could leverage on personal credit to get the business off the ground. A report by the U.S. Small Business Administration (SBA) showed that 46% of small business owners harness personal credit cards to either pick up their business or get it in motion.

Financing a business with a personal credit card means that you’ll be liable for any debt that is incurred. It also means that every other risk that is involved will be borne by you. However, there are also rewards that accompany personal credit cards.

And aside from considering personal credit cards for financing your business, there are other options you can consider as alternatives. For instance, you can opt for an angel investor or venture capital or even write to friends and family members for financial support to kick off your business.

If you would prefer to opt for a credit card to fund your startup, here are the pros and cons of using a credit card to fund your startup.


Pros Of Using Credit Cards To Fund Your Startup


1. Reduced Interest Rates

The U.S. News News and World Report the average annual percentage rate (APR) for credit cards in their database as 15.56% to 22.87%. With separate business credit cards, there are quite similar rates at 14.33% to 22.19%. Business financing sources such as asset-based lending often showcase higher interest rates that surpass credit cards.


2. No Balance Transfer Fees

There are often no balance transfer fees with credit cards. If you have to use your personal credit card to pay for your business, you can transfer the balance to a business credit card once you have the business fully up. It is advised to do this to keep your business transactions separate from your personal transactions for tax reasons.


3. Reward Features

Credit cards often offer rewards in terms of points earned toward other purchases, airline miles using the card, or Cash Back incentives. You can leverage these rewards for benefits on your business.


4. Don’t Lose Any Equity

You do not lose any equity in your startup especially since you own the debt. With a credit card, whether you use a personal or business credit card, you’ll incur debt, which is a liability. If you use debt financing when financing a business, you do not sell stock and also no transfer of any ownership equity.


5. Revolving Credit

It is revolving credit and it means that you can reuse it when it is paid off. Whether it’s with a personal credit card or business, you always use it after paying debts, since it revolves around credit.


6. Used to Manage Cash Flow

You can use credit cards to manage cash flow. So, with a credit card that keeps track of your spending, especially in categories, you can leverage it to manage cash flow.


Cons Of Using Credit Cards To Fund Your Startup


1. Credit Cards Are Easy To Abuse

It is easy to get into a ditch of credit card use if you do not caution yourself enough. You could run up high balances and miss payments which could result in some financial penalties. There is a lot of responsibility that must be played on your part as a cardholder. If you go over your limit or miss payments, you will be liable for high fees that will run your business into unnecessary expenses.


2. The Debt Limit May Not Be High Enough

If you use a personal credit card for business, you may not have a debt limit that’s high enough. So, with a personal credit card for your business, be sure that you have access to a high credit limit on the card. You might run into a personal emergency and may need the card for quick use.


3. Can Be Locked Out of Other Types of Credit

With a high credit balance, you could be locked out of other credit opportunities. Once you have paid your startup cost using a credit card, you would find that you or your business have run into too much debt that would make you unqualified for other forms of business financing while your business continues to operate.


Credit Card Funding Alternatives: Other Ways To Finance A Startup Business


Getting funds to run your business can be quite challenging. Credit cards are one way – but they aren’t the only way – often not the best option. Here are other ways you can finance your startup business.


1. Build Your Savings

Building your savings is one of the best and reliable ways to build your startup. You can save up to your budget and use a portion of it to get your business started. You will likely increase the money when the business generates profits for you than if you left it in the bank.


2. Reach Out To Friends And Family Members

You may be surprised at how your friends and family members can become intrigued by your business idea and turn out to offer financial support. They may be ready to offer small loans with little or no interest or offer support in terms of resources which may include providing you an office space, offering furniture for your office, and others.


3. Generate Funds Through A Personal Asset

You can generate Funds through any of your assets. Most people can only point to their homes as the nearest personal assets they own. If this is your case, you can use the equity you have built in the home in so many ways to raise startup capital.

First, you can use the asset for a home equity loan. A home equity loan is a second mortgage which you have to go through in a similar procedure of application as in the case of your first mortgage. You pay money monthly to settle the loan but it is a valuable source of startup capital.

Second, you can refinance your home to draw some equity that can be used in funding your business.

Third, a home equity line of credit (HELOC) taps your home equity to make it possible to borrow money against it. After repaying the loan, you can reuse the line of credit.


4. Small Business Administration Loans and Grants

The SBA offers businesses loan and grant opportunities. While the agency doesn’t directly offer loans to business owners, it, however, guarantees lenders who provide the loans. The SBA Microloan and SBA loan are two types of possible loans to be accessible through SBA.


5. Crowdfunding

Several people have benefited from crowdfunding. This is a process of raising funds through public support for starting your business. It has become increasingly popular in recent times and is generally accomplished through one of the internet crowdfunding platforms. You can consider it to kick off your business.


6. Venture Capital 

Venture capitalists help to fund your business if they find interest in what you are doing. They will often require a percentage of the firm’s ownership. After a business has been launched, those financed by VCs are typically taken public.


7. Angel Investors

Angel investors, like VCs, also take interest in your venture. They are often high net-worth individuals that offer cash and often advice on the possibility of becoming successful in a particular project. Oftentimes, they require a stake in the ownership of the company together with some returns on their money.


How To Use Credit Card Financing Carefully

Being careless or indisciplined in the use of credit cards can result in some very bad effects on your finances and personal life. If you are using your credit card to finance your startup, you are expected to have done your homework to be sure about the potential of profiting from the business and repaying your debt. It is very crucial that you are careful with using your credit card.

Go through the card’s terms and agreements properly to avoid getting yourself into a situation where you get stuck. If you are unclear about anything, ask questions. And if it appears something doesn’t fit your circumstances, then send the credit card back.


Pay your debts too in good time. Find a way to automate your repayment by setting up autopay with your bank or card for timely payments. One late payment can result in a negative impact on your credit for a long time.


Be sure that you are earning beyond the minimum payment every month. If not, your repayment might take you a very long time to settle. You can also negotiate a reduced Interest rate if you have a payment history with the credit card company. You may be provided lower interest rates on your card.


Do not go over your credit limit. If you do, your interest rates may go overboard. Ensure that your monthly statement is accurate. Go through your statement every month to be sure there is nothing shoddy reflecting there – especially to avoid falling victim to a potential scam.

Clear out your credit card debt as fast as you can. You may want to refinance your credit card debt with a traditional business bank loan as your business grows. Otherwise, if your credit card company sees that your balance continues to creep up, they may decide to reduce your credit limit. So, be sure that you do not exceed your credit limit.


Wrap Up!

Using your personal credit card is a way to finance your startup business, but it isn’t a great way. We have revealed a lot of factors here that go into making the best decision with credit cards. The pros and cons of using credit cards also. But it is better to replace it with a more traditional business financing as soon as you can.

It is very important to check out the terms and conditions of the card you are considering and follow them. Look into the other alternatives available for financing your small business if it is feasible. It would likely be a better option to use credit cards.

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