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Friday November 15th 2019

Using Credit Cards to Finance Your Startup

Credit cards should never be considered your first choice for raising capital for your startup business. The risks in running your credit balances up are too high for a business that has not yet proven itself stable. That said, there are some situations that could benefit from the short term or carefully structured use of a credit card to cover certain costs. If you plan to use credit for business funding, track your purchases carefully and pay the cards down as soon as possible.

Recognize the Risk Up Front

A personal credit card can seem like a convenient way to cover many of the costs of starting your business. The trouble with using your own card for a brand new business is that you have no guarantee that your business will be able to pay the balance down within a reasonable amount of time. The safest way to gain capital for a startup is through a traditional small business loan through a bank you trust. The interest rates on credit cards can be as much as 10% higher than a standard loan’s interest rates, which means you will pay 10 times as much for your credit card loan over the long run.

Use Balance Transfers to Your Benefit

If you choose to carry a high balance on your credit card after purchasing items such as desks, office chairs, printers, computers, and other operating equipment, watch your balance and interest rates carefully. If you have more than one credit card, you might benefit from transferring the balance from one card to another. Many credit card companies offer special discounted rates for customers who transfer balances. The balance transfer could save you several months of high interest rates on your card’s balance.

Create a Plan for Paying off the Balance

Before you swipe the card for the business purchase, have a plan in place for paying the card off. You should be able to project your expected company earnings for the near future. Figure out how soon you can pay off the card’s balance in full based on your sales projections. Once you make the purchases, pay the minimum required payments on the card until you reach your expected payoff date. Always have a backup plan in case your company does not do as well as you expect it to do within the time frame you have selected.

Credit to Cover Cash Flow

One of the most powerful uses of a credit card for a business is as a stop gap cash flow resource. When you submit an invoice to a client, you never know how long it will actually take the client to pay you back. You can loan your company the amount of the invoice by using your credit card during the time between submitting the invoice and receiving payment. When the payment is received, you can use it to cover the charges you had to make with your card. The credit card can keep your company solvent without depending on the payment time frame of your client. Of course, this method relies on timely payments from your clients.

The bottom line is that using a credit card to finance your startup is a risky endeavor. Use your credit wisely and be careful to maintain full control lest the credit cards begin to inhibit your business growth.

Increased Sales May Not Keep Pace with Rising Commodity Costs

The final three months of 2010 were incredibly encouraging for Corporate America. The S&P 500 companies reported sales figures that largely outpaced expectations. Profits rose an average of 37% over the final quarter of the year, with sales figures that showed at least a 6% increase. The implications of this increase in profit and sales numbers continue to drive consumer confidence and seem to imply that the economy is still healing from the recent recession.

Sales Indicate Real Demand

One of the most positive aspects of the increased sales figures is that they seem to show profits based on actual demand rather than profits that resulted from companies cutting back. That means that the improvements are actually signs of economic health rather than conservative measures intended to cut costs out of the budgets of corporations. The progress of the last quarter represents actual increased sales, which have been slow to pick up in recent years. Economic recovery is not entirely complete, but the last quarter sales figures are a sign that it is still moving in the right direction.

Increased Foreign Competition is a Concern

Some companies are concerned that commodity costs will rise due to an increase in global competition. Corporations are finding a weaker domestic market for their goods as the demand for foreign goods is rising. This could cause the corporations to find new ways to increase demand in the face of competition from markets that can afford to lower their prices. Conversations about increased spending and weaker international demand have already caused dips in the stock market as investors become concerned that the 2010 sales increases are not sustainable numbers. If commodity prices rise as expected, the combination of high competition and more expensive manufacturing processes could be damaging to the economic turnaround.

Businesses Could be Forced to Pass Along Higher Costs

As companies face higher costs in 2011, economic researchers are concerned that those increased costs will need to be passed on to consumers in the form of rising prices. If prices can remain stable over the next year, consumer confidence would continue to rise. If prices begin to rise later in the year, however, they could have a negative impact on the country’s ability to climb out of the recent financial struggles. Rising prices on consumer goods due to the rising cost of manufacturing resources without a substantial decrease in the unemployment rate could set the economy back by at least a year.

Basic Materials More Expensive

Although the sales increases are a positive sign, many companies remain guarded in their optimism. Many of the biggest United States manufacturers are worried about increases in their manufacturing costs over the next year. Companies are already setting aside billions of dollars that they expect to need to use for increased commodity costs in the near future. Some companies expect to increase spending in their research and development areas as well. Many analysts worry that these cost increases will not be covered by the modest gains in sales and profit figures from the end of 2010.