Should you fund your startup business with a credit card? · regardless of whether you have taken out business or personal credit cards. That’s because both types of cards normally

Credit Cards (https://www.creditcards.com) · Credit Card News (/credit-card-news/credit-card-stories.php) ·Should you use credit cards to �nance your startup?

Should you fund your startup businesswith a credit card?Here are the bene�ts, the drawbacks and other options to consider

By Beth Braverman (/credit-card-news/authors/beth-braverman.php) | Published: June 26,

2018

(https://www.creditcards.com/credit-

card-

news/authors/beth-

braverman.php)

Personal Finance Writer

Covers cool and trendy credit card stories

(/)

As any entrepreneur knows, one of the most challenging aspects of getting a new business o�

the ground is having adequate cash �ow for growth. Securing �nancing can be a struggle,

which is why many small-business owners turn to their credit cards as a signi�cant source of

�nancing.

A recent survey (https://www.ustrust.com/articles/insights-on-wealth-and-worth-business-

2017.html) of startup founders by U.S. Trust showed that 16 percent turn to credit cards to

start their business, with 37 percent of millennial owners using plastic to �nance their

business.

There are plenty of successful examples of entrepreneurs who built wildly successful

companies by spending smart on their credit cards (Hello, Google

(https://www.technologyreview.com/s/400833/search-us-says-google/)).

“I’ve heard a lot of stories about startups that were �oated on credit cards,” says Paul Downs,

author of “Boss Life: Surviving My Own Small Business.” “But that’s survivorship bias. No one

pays any attention to the people who went down that road and didn’t succeed. I’d imagine

there are a lot more stories like that than the huge success stories.”

Credit card �nancing, despite its popularity among startup founders, does carry some risks.

Here are the bene�ts, the drawbacks, other �nancing options and what you need to know if

you charge ahead:

The bene�ts

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The most obvious advantage of credit card �nancing is that it’s easily obtainable if you already

have good credit and credit cards in your name.

“Credit card �nancing is low-doc,” says Dallas-based small-business funding expert Myra

Good. Issuers “don’t care if you started your business yesterday. They’re looking solely at your

credit score. A lot of business owners like that.”

If you’re able to pay o� your balance in full each month, business credit cards

(https://www.creditcards.com/business/) also can provide lucrative rewards. They typically

have higher credit limits than personal cards, and business credit cards often allow you to add

employees as authorized users.

Credit cards also can be used as a strategic tool to manage cash �ow.

Ken Wentworth, whose Wentworth Financial Partners o�ers part-time chief �nancial o�cer

services, advises small-business clients to wait until the due date on an invoice and then pay

the invoice with a credit card.

That could potentially provide you 60 days after a purchase until you need to pay for it,

assuming a 30-day invoice period and a 30-day credit card statement cycle.

Wentworth also has worked with clients who use 0 percent interest credit cards

(https://www.creditcards.com/zero-interest/) with long introductory periods to provide startup

funds for a new business.

“You can have interest-free money for over a year, but you have to build the payments into

your budget so that it’s paid o� before the introductory period is over,” he says.

See related: How business owners choose their credit cards

(https://www.creditcards.com/credit-card-news/how-business-owners-chose-cards.php)

"IF YOU'RE SOMEONE WHO HATES DEBT

AND IS GOING TO PAY IN FULL, GO FOR A

CARD THAT OFFERS REWARDS. SIGN-UP

BONUSES CAN BE VERY GOOD ON

BUSINESS CARDS."

(/)

The drawbacks

For many entrepreneurs, using credit cards as a main form of �nancing is risky.

If the business fails, you’ll be saddled with debt for which you are personally responsible –

regardless of whether you have taken out business or personal credit cards.

That’s because both types of cards normally require a personal guarantee.

If you’re using credit cards for long-term expenses, it can be an extremely expensive way to

access cash. The average annual percentage rate on credit cards is 16.73 percent, which is

around double what you’d pay for a loan backed by the Small Business Administration.

Plus, using credit cards to �nance your business can foster sloppy �nancial habits if you’re

prone to putting o� payments.

“If you don’t pay the card o� in full, that just compounds the cash �ow problem,” says Krista

Tuomi, a professor at American University, and an expert on entrepreneurial �nance.

When you take out a business loan, in contrast, you need to set aside a certain amount every

month to pay it – and you don’t have the option of making a minimum payment when cash is

tight. That forces you to maintain adequate cash reserves.

See related: 5 loan options to fund your small business (https://www.creditcards.com/credit-

card-news/loan-options-small-business.php)

Other funding options to consider

Using a credit card may not be the only way to raise capital to keep your business running. A

few other options:

Peer-to-peer lenders

"IF YOU DON'T PAY THE CARD OFF IN

FULL, THAT JUST COMPOUNDS THE CASH

FLOW PROBLEM."

(/)

This is an option to consider if you don’t have strong enough credit to get a bank loan.

In peer-to-peer lending, the money comes from investors who make money by receiving

interest on the loan.

Prosper and Lending Club o�er small-business loans. You can use tools on the sites to

ascertain what your interest rate would be.

For example, a business owner with excellent credit seeking a $40,000 loan for his or her

business on Lending Club might be o�ered an interest rate of 6.83 percent and an APR of

9.61 percent (which includes a one-time origination fee of 4 percent, or $1,600, collected

out of your loan proceeds and used to pay Lending Club as a fee for its services).

A bank loanYou’ll go through a more rigorous credit check than you’d need for a credit card, and you’ll

need to provide some sort of collateral to secure the loan. The bank also may require a

business plan to evaluate your business potential.

For example, to qualify for a Bank of America Business Advantage credit line or term loan,

you will need satisfactory personal credit (typically de�ned as a FICO score greater than

670), at least two years in business under existing ownership and at least $100,000 in

annual revenue.

Sell equity

Angel investors may provide funding, but they also typically want some say over business

operations. That can bene�t you if they bring valuable business knowledge to the table,

but it can back�re if you end up clashing.

There’s also the risk of giving up too much equity in exchange for investors’ money.

Getting good �nancial advice is a must if you go this route, and that often means

springing for a lawyer with experience in startup �nancing.

Borrow against your receivablesIf your customers pay you after you have worked with them, such as a professional

services �rm, you may be able to borrow against your receivables.

If you go this direction, it is important to understand that the company will deduct its

repayment amount directly from your business bank account in set amounts each week

until the loan is repaid.

(/)

This can leave you in a situation in which you are low on cash for the duration of the loan,

unless your future cash �ow is steady.

CrowdfundingRunning a campaign on a site such as Kickstarter or Indiegogo is another option,

particularly for product-selling entrepreneurs who are very active on social media and can

generate interest quickly.

Such sites rely on donation-based crowdfunding, so you don’t have to repay donors, but

it’s common for companies to use the cash as pre-orders for products.

If you charge ahead

Go for a small-business credit card, rather than a personal credit card.

A small-business credit card will make it easier for record-keeping and tax purposes to

separate your business expenses from your personal charges.

The downside of business credit cards is they don’t o�er the same consumer protections

(https://www.creditcards.com/credit-card-news/business-credit-cards-10-di�erences-

1269.php) o�ered by personal cards.

Shop around to �nd the best card for your business

(https://www.creditcards.com/business/)’s needs.

“If you think you’re going to carry a balance from time to time, look at the interest rate,” says

Gerri Detweiler, head of market education at Nav, a credit service for small-business owners.

“If you’re someone who hates debt and is going to pay in full, go for a card that o�ers

rewards. Sign-up bonuses can be very good on business cards.”

"I'VE HEARD A LOT OF STORIES ABOUT

STARTUPS THAT WERE FLOATED ON

CREDIT CARDS. BUT THAT'S

SURVIVORSHIP BIAS."

(/)

See related: 7 rules for using credit cards to �nance a dream

(https://www.creditcards.com/credit-card-news/7-rules-using-credit-cards-�nance-dream.php)

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Should you fund your startup business with a credit card? · regardless of whether you have taken out business or personal credit cards. That’s because both types of cards normally