Top Personal Finance Blogs
Monday September 16th 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.

Realtors Trying to Head High Down-payments Off at the Pass

The housing and financial crisis of the past few years has caused Congress to take another look at the regulations surrounding these two industries. The Dodd-Frank Wall Street Reform and Consumer Protection Act, which was signed into law by President Obama last July, contains a number of new regulations and reforms many others. Several of these relate to home mortgages, and, unfortunately, the end result may be that it becomes almost impossible for the average household to purchase a home.

The ultimate reason this is so comes down to the risk retention section of the Act. The inter-agency group working on this act is considering a change to the loan standards for a Qualified Residential Mortgage (QRM) that would necessitate extremely high down-payments –as much as 10 or even 20%. As the vast majority of home loans are QRMs, this will effectively rule out home ownership for anyone who can not come up with the requisite large down-payment.

A quick look at the numbers will show why this is the case. The median home price in 2009 and 2010 was $170,000. Assuming closing costs of 5% of the home value, this translates into a 20% down-payment of $42000, or $27,000 for a 10% down-payment. A family making the median income of $49,777 would take 14 and 9 years, respectively, to save enough to meet these requirements, and that’s assuming a savings rate of $3,000 a year, or more than 6%. The current national savings rate is 5.8%.

Families who make less than the median income, or those who live in areas with high home prices, would have to save even longer. A newlywed couple might have children leaving for college before they managed to save enough to put down on a home. The institution of these requirements would be a disaster for the real estate industry and put home ownership out of reach for tens of millions of families.

Fortunately, the National Association of Realtors is fighting these new regulations. On March 16 they, along with two other organizations, sent a joint letter to the group of regulators considering these requirements and urged them to abandon the plan in favor of more reasonable approaches. There are other options the group could pursue, as NAR pointed out in their letter. A better approach would be the adoption of stronger core standards for mortgage underwriting. This would lower the risk of default. Such standards would include strong documentation requirements, prohibitions on high-risk loan features like balloon payments, and requirements that the lender assess the borrower’s ability to repay the loan.

All of these reasonable requirements were ignored by many lenders during the housing boom, and now all homeowner’s may pay the price. Low down-payment loans have been around for decades and have tended to work quite well. If regulations are put into place that will prohibit predatory lending, they will continue to work in the future. There is no need to arbitrarily lock tens of millions of families out of home ownership to achieve the goal of stability in the housing market.