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For most people, credit cards are easier to obtain than small business loans. The reason is that small business loans are difficult to obtain if the business has yet to demonstrate it’s success – especially for those who want a good rate. Also, small business loans require collateral, making them difficult to obtain for customers who do not have the proper collateral. However, as you may have noticed in your mailbox recently, it is not all that difficult to obtain a credit card for most people. Thus, many people choose to go the route of credit cards versus loans when financing their new business.
So, is a credit card the way to go for those who are starting a new business? Let’s explore the pros and cons of doing so.
As mentioned, credit cards are more easily obtainable than small business loans for most people. They are also very easily obtainable for small businesses. If you can get a decent rate on a card, then this may be a viable option to finance your business. Whether you use a personal or business credit card to finance your new business, it’ll effectively be like using a loan, as someone else will pay the upfront costs while you pay them on the back end. However, with it being much easier to get a credit card, you’ll probably want to go with this option if you must finance the business with debt – unless you can get a great rate on a small business loan.
Additionally, credit cards are a method of easy payment. You either punch in your number (Internet) or swipe your card and you’re done. You can pay for it later – once your business starts producing revenue. Saving the entire upfront cost is not required and you don’t have to deal with a loan officer – not a bad idea if you’re going to use debt.
Using a credit card to finance your new business is similar to taking on any other debt. The risk of incurring interest and late fees is present and you will likely incur interest fees, as you probably won’t pay off the entire bill in 1 shot. Otherwise you wouldn’t be using a credit card if you had that kind of cash laying around.
To get around – or at least delay – paying such fees, you could go with a card that has a 0 percent introductory rate (like the Chase Ink credit card). Such cards are out there and you can find a few by looking around in our business credit cards section. You could also transfer your balance to a card that has an introductory 0 percent APR on balance transfers if you’re already incurring interest on a card.
Another downside to using a credit card to finance a new business is that people tend to spend more with credit cards than they do with cash. Rewards cause people to spend more than they otherwise would, according to a study in 2008. Also, people tend to part ways with money via credit cards more easily than they do with cash. Thus, according to studies, people spend more when using credit cards than they do when using cash.
The risk of default is another potential downfall to using a credit card in this situation. If you get in over your head and are unable to pay off your credit card debt, then your credit will suffer for several years. This could have a snowball effect on your ability to take on additional debt in your personal and/or business life. It’s never a good idea to be viewed as a risky customer if you plan to take on debt down the line.
In general, it is best to have the cash to pay for things upfront as opposed to using debt to finance large items. Of course, we all don’t have $50,000 laying around to start a new business, but save up as much as possible so that you minimize the amount of debt that is required to finance your new business.
To answer the question of whether financing a new business with a credit card is a good idea or a bad idea, it is generally a bad idea. Twenty percent of bankruptcies are filed by small business owners. Additionally, you’re price-sensitivity is likely to decline when using a credit card to finance your business, meaning that you’ll have to remain disciplined so that you’re spending does not get out of control. Otherwise, you could lose your business and possibly your personal assets, as those are fair game if you become a sole proprietor.
With that being said, if you are determined to get your business going before you can save up the full upfront amount, make sure you get the best credit card offer that you can find. Look for rewards that you’ll actually use. For example, if you plan to travel a lot on business to meet with prospective clients or business partners and so on, go with something that has a lot of airline rewards. Also, find something that has a low or 0 percent introductory APR so that you don’t get caught up in paying interest early on. In general, treat is as you would with your own finances. Don’t purchase things you can’t afford to pay back and you should do just fine.
- Credit RequiredExcellent Credit
- Rewards ProgramEarn up to 5% cash back on business purchases, 1% back on everything else.
- Signup Bonus$200 Bonus Cash Backafter you spend $3,000 in the first 3 months from account opening.