Starting your own business is the American dream, but financing that dream is a daunting task for many. Investors and banks don’t always give an unproven startup the time of day. Instead of getting declined for small business loans and turned down by investors, consider using credit card financing for your small business. The interest rate and terms might not be as favorable as other lines of credit, but when you’re just starting out in business, it’s easier to get this type of credit instead of vendor accounts or other lines of credit. Here’s what to be aware of.
Credit cards might not be the first type of funding that comes to mind when you think of ways to make money for your small business, but they provide several advantages. The Small Business Administration reports 10 percent of startup capital is obtained through both business and personal credit cards. The amount of businesses using credit card funding is tightly tied to the economy. When the economy is improving, banks are more likely to give out other lines of credit, lowering the need for credit card financing. When loan requirements are stricter, businesses turn to credit cards instead of getting rejected loan applications. When you’re getting a business credit card, it’s easier than going through the paperwork required for a business loan.
Using business credit cards by American Express is one way to finance your startup. Photo by Images of Money via Flickr.
Another advantage of credit cards is that you get rewards points and promotional interest rates with many cards. If you need business travel, it makes a lot of sense and saves money if you get airline miles. Negotiate with a small bank or credit union to get more favorable terms. This is a good tactic if you don’t have the greatest personal credit, but you’d like to open up a business credit card. Some banks offer longer grace periods, so you aren’t paying interest on purchases you pay off before the reporting date.
Business credit cards are not the majority funding source for businesses for a variety of reasons. The first issue is the personal guarantee. Even if you have business credit, many institutions require personal guarantees. A personal guarantee puts your personal credit score and assets on the line. If you don’t make your payments on time with your business, it reflects on both business and personal credit reports. If you default on the card, the company may seize personal assets to collect on the debt.
Another disadvantage is the amount of funding you can get through a business credit card. Most business credit lines are not as large as a bank loan. If you have a large funding need, you may need to take out multiple credit cards to come close to your funding goals. The interest rates vary, depending on the company you choose and your credit score, but after the promotional period, they tend to be more expensive than bank loans. The rates also tend to fluctuate, affecting existing balances. If you’re carrying a large balance, and all of a sudden your rate goes up a few percent, you’re paying a lot more than you expected.
Do you recommend using credit card financing for small businesses? Share your thoughts in the comments.