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.