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Posted by Matt Osborn - 20 April, 2018

The Advantages and Disadvantages of Financing Your Start Up with a Business Credit Card.

Most people who start a small business, do so from money that they have saved. As the business begins to grow, there is often a need for more capital injection to support the said growth and the lack of cash flow.  Unfortunately, most startups find that banks will not loan them the money they need. Even with a good personal credit history, they still find that banks will not take a gamble on them. This is why most of them opt for a credit card for their business.

Having a credit card for the business helps your business build a credit history. In fact, according to MyFico, 35% of your credit score is based on your credit history. With a good credit history for the business and the owner, it becomes a little bit easier to get a loan. Unfortunately, though, most businesses end up in a lot more debt than they anticipated. Often, the debt is accrued through making small job related purchases, paying for business travel, entertaining potential clients and so on. If you are using a credit card to finance a startup, there are pros and cons that you should be aware of as follows:

Advantages of Using a Credit Card to Finance Your Startup

  • No collateral needed. Most entrepreneurs love this aspect. If you were to get your loan from a bank or from some other source, chances of being asked for collateral are 100%. Should you opt to go with investors as an option then you have to think of the equity that you can part with.  With a credit card in hand, you get unsecured money without having to worry about collateral or equity.
  • 0% Offers. There are very many offers that do not charge interest the first few months or even the first year.  This is attractive to a business owner running a startup because they are able to fund upcoming purchases as well as other expenses while not having to worry about interest rates. This can give you the money you need to fund your immediate growth and make the most of the card before you have to start paying interest on it.
  • Keep your equity. A startup with a good idea, great management, and potential for growth and profits is usually one that most investors will not pass up. They will be happy to give you the funds you need, but you have to give them equity in exchange. If you are not keen to let go of equity, then a credit card is a better option for you. With investors, comes oversight as well since they want to have a say in the business as well. This can be good or bad, depending on the person you partner up with.
  • Individual spending limits. When you are using credit cards for business, you are able to set spending limits for individuals. By putting these spending limits in place, you are able to keep your spending under control. Of course, you still need to keep an eye on how your employees use the cards so be sure to set the rules ahead of time.
  • Accounting made easy. With a business credit card, you can quickly have the details needed for expense tracking for your monthly and annual reports on spending. If you are using a personal credit card with multiple users, expense tracking can become a major nightmare for the company.

Disadvantages of Using a Credit Card to Finance Your Startup

There are several disadvantages of this as follows:

  • Overextension. Financial advisers always recommend that one pays cash because it registers in your mind as money spent. If you are using a credit card for a myriad of purchases, chances of spending too much are high. In such cases, you may end up misusing the card and become overextended. Luckily, if you find yourself in such a situation on this card and with other debts, you can get national debt relief sites to help you consolidate your debt as a strategy to reduce it and finally become debt free.
  • It merges personal and business debt. Most times, having a business credit card blurs the distinction between personal and business finances for the following reasons:

    1. It affects your credit score. The card will reflect on your personal credit so if you misuse it and end up overextended and unable to pay, your credit score will be negatively affected.

    2. Risking a lawsuit. Should you get caught up in business consumer debt to the point that it brings your startup down, then you can expect to be dealing with debt collectors.  They could come after the company or if you had not incorporated the business, they could be after your personal assets as well.

    3. You may not qualify for a business credit card. The underwriting for a business credit card is actually based on your personal credit score. If you have had poor credit in the past, you will find that this will affect your ability to get credit cards for the business.  This in turn can hinder your growth if this was your only hope for funding

    4. Low credit limits. You don’t need collateral to take a credit card, which is absolutely fantastic.  However, this also means that the spending limits are pretty low. The ceiling has been set at around $50,000, so if you are looking for more than that, chances of getting it unsecured, are low.

It is important to note that credit card debt in the USA is on the rise. According to a USA today article, the average home carries $16,883 in debt. When you add auto loans, education loans and mortgages to the equation, the debt burden for an average family rises to a staggering  $137,063.  It is therefore important for you to consider your personal consumer debt before opting for a credit card for your business.

If you find yourself in over your head, it is important to speak to people who can help you get out of debt. Options available include debt consolidation that can help you deal better with your current debt situation. Remember that pumping money into your startup is not a guarantee that the business will succeed in the end. Remain positive but also ready for any eventuality.

Control your company's cash flow

Marina_technical_Debt-01.pngAuthor Bio: Marina Thomas is a marketing and communication expert. She also serves as content developer with many years of experience. She helps clients in long term wealth plans. She has previously covered an extensive range of topics in her posts, including business debt consolidation and start-ups.

Topics: Finance, Management

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