Finding the right source of funding for your business can be challenging. Whether it is securing bank loans, using venture capital or angel investors, or relying on your own savings, the process can be stressful, slow, and time-consuming.
Those difficulties often lead small business owners to use personal credit cards to finance small business operating costs. Should you use credit cards to fund your startup?
The answer depends on the individual, the amount you want to use, and your ability to pay yourself back. As seen in the recent article, From Business Concept to Funding: Why Successful Entrepreneurs Think Differently, deciding whether to use credit cards is another critical financial decision for small business owners to make.
Among the advantages of using credit cards for startups are:
- Low-interest options. If you have decent to good credit, you are likely eligible for low-interest or even zero-interest rates, even if for an introductory period only. Not having to pay interest for six or 12 months is a big benefit.
- Equity retention. When you do not rely on outside investors, you retain the profits from your lucrative idea. Self-funding via credit cards lets you hold on to equity in your company.
- No collateral needed. With loans, you will need to put up collateral, which is seized if you do not repay your obligations on time. However, credit cards require no collateral.
There are some disadvantages to consider when thinking about using credit cards to fund a small business.
- Separating business and personal. When you use your own funds and go deeper into personal debt for your business, you are blurring the lines even further between your business and personal finances. These shared obligations can be a strain on you and loved ones.
- Low limits. With credit cards, you are limited by your credit limits and how much of that limit can be used for cash withdrawals.
- Liability. When using your own funds, you expose yourself to personal liability from creditors who could seize both business and personal assets in the case a business is unsuccessful.
- Credit score damage. Opening more accounts, reaching your credit limit, and extending your personal liability can cause your credit score to plummet.
Making the Decision
Before deciding whether to use credit cards for your startup business, be sure you have considered the following questions:
- How are you going to spend the money? What is the risk? If the capital is needed for a critical business need, then it may be worthwhile to use a credit card. If there are no other sources of income available to meet the need, what is the risk of not using credit cards?
- Do you have other options? There are other things that you could explore, such as a home equity line of credit or using a peer-to-peer lender, that might make more sense and carry less risk.
- Do you need to spend the money now? If you do not, consider what the impact would be to waiting until you are a bit more flush with cash and can avoid going into credit card debt.
At Benetrends, we offer a different option. By using your existing 401(k) or IRA accounts, you can finance your startup or ongoing needs without incurring early withdrawal or tax penalties. To learn about how Benetrends can help finance your small business, download Innovative Funding Strategies For Entrepreneurs today!