Coming up with a business idea is relatively easy as compared to coming up with the needed capital to start it. It is great if you can get the support from your family and friends, but if not, you would of course need to find another way to start your business.
Borrowing capital from a bank may be a challenge for starting up a business, especially that the fate of your upcoming business is still in question.
Using your credit card, however, may be an option. And a lot of startup businesses are doing this according the National Small Business Association.
While credit cards are very helpful, the improper use of it is very risky, even when used on a personal level. It takes a lot of discipline to properly use a credit card, and this gets magnified when used for bigger purposes such as for funding a business.
That is why we are here to share some pros and cons of using a credit card to fund your business.
Advantages & Disadvantages of Using a Credit Card to Fund Your Business
When to Consider to Fund Your Small Business
There are many banks out there that are offering different credit cards you can get that can be used to finance your start-up. The very basic use for it is covering for different expenditures needed like rent, utilities, and supplies.
Benefits of Using a Credit Card
- It’s Very Easy to Use
Unlike from loan, it’s way easier to apply for a credit card. Once you get your credit card, you can use it for whatever you want to do as long as paying via credit card is acceptable.
- Convenient Terms of Revolving Credit
A revolving credit lets you borrow your entire credit limit after paying off all your card’s balance. Maintaining a good standing on your card allows you to maximize its use. The best part is that you don’t need to reapply to make it work. Just pay all your balance and you’ll get your full credit limit each month.
- Possible Lower Rates
Banks usually offer credit cards with low annual fees. For as long as you are paying on time, you would also not need to worry about interest rates.
- No Collateral Needed
Huge loans typically require collateral. On the other hand, credit cards are essentially unsecured loans and do not need any collateral. You would not need to risk any of your property. And application for credit cards doesn’t need collateral, creating less pressure to make your business profitable as soon as possible.
To encourage the use of credit cards, banks offer various rewards. You gain points that go higher with the value of each use. Rewards vary, and range from cash back rewards, miles, and different merchandise.
- Builds Up Credit Score
The use of credit card can help you build your credit rating, especially if you never miss a payment. Since you would be using your card for essential transactions that would be paid with your business’ income, then you are bound to build a strong credit score.
Risks of Credit Card Financing
- The Liability Factor
Usually, business owners forego of the money they invested when starting a business. This is money they’ll get as returns sooner or later. The case is different if you start your business using a credit card – you’ll need to think about it because you’ll need to pay for it. It is debt, and it’s a liability, something that you should really need to consider. There might be a huge pressure to make money out of your new small business idea.
- Mixing Between Personal and Business Credit
It’s great if you have multiple cards, and you can dedicate a specific card for purely business needs. But if you only have one card, then it might be a challenge to keep track of what’s for business and what’s for your own use. It is highly recommended that you really use a separate card for your business.
- Potentially Low Limits
Banks do not give out high credit limits to everyone. You’ll need to prove that you have the capacity to pay off your balance. If this is your first business, you might not get a high credit limit.
- Less Funding
With a low credit limit, you will have less to finance your business with. Having a low credit limit will definitely take a toll on what you can use your credit card for, which might not even be able to cover for all your business’ needs.
- Possibility to Overspend
It is very easy to use a credit card so it is also easy to overuse it, and overspend because of it. Discipline is really needed to use your card properly, may it be for personal or for business use.
Making the Right Decision
The use of a credit card is an option that you can have to fund your business. There are other options that you can take and it all depends on your choice.
Any step you take has risks involved, and any option has its pros and cons. Whatever decision you make, check whether the advantages weigh more than the disadvantages.
The Bottom Line
It is handy to use credit card to fund a business but there are underlying problems it can hinder your plans to happen. Be cautious with the impact it will give to your personal life and business career whether it’s positive or not.
Even if it’s a one-way ticket to your dream, once you pursue this method, there’s no turning back. Only you and your managing skills can determine your business success.