Using a Credit Card To Finance Your Small Business

It won’t come as a surprise to know that many small business owners rely on a credit card to fund their startup. Many are limited in funding sources and this option appears quick and reliable.

credit cards

There are many reasons why an entrepreneur or business owner might opt for credit card financing: to open their business, to cover costs of operating or even for business expansion further down the line.

With a strong credit score, you can get your hands on a credit card with a good interest rate, high limit and even a rewards program making funding your business with credit rather legitimate. On the other hand, the credit card alternative may not be ideal for you, depending what type of financial standing you’re in. 

Personal Credit VS. Business Credit

Simply put: A new business has no credit. It is new and therefore, has no business credit. Just like with your own credit score, it will take time and effort for your business to build its credit as well. So how are startups getting off the ground? Well, if a business owner has good personal credit, then they’re probably building off there.

If funding your new business with your personal credit cards, you should know that there are significant risks tied to such a decision. First and foremost, you are reliable for any and all debt incurred. In other words, there are both pros and cons to using personal credit for your startup.

There are equally other options when it comes to funding your startup business, especially if you don’t necessarily have a good personal credit. Venture capital or angel investors are two great possibilities, notably when it comes to high-growth organisations. That being said, you’d have less chances with a bank loan or a line of credit, seeing as your business doesn’t have credit yet. 

Pros to Using a Credit Card

If you’re considering using a credit card, be it a personal or business card, you can take a list at the following pros and cons:

1. Better Interest Rates
For many startup business owners, a credit card may actually be the best option in terms of interest rate. According to recent studies on Canadian business credit card interest rates, the average was found to be at 16.84%. Asset-based lending or even trying to apply for a personal loan in order to fund your business will generally have a higher interest rate than a credit card.

2. No Equity Shares
The debt incurred is all yours, therefore you wouldn’t lose any equity. It doesn’t matter what type of credit card you use - be it personal or business - your debt is seen as liability. When choosing to fund a business through debt-financing, you aren’t giving up any ownership equity by selling stock in your business.

3. No Eventual Balance Transfer Charges
Ideally, when building your startup, you'd have a personal credit card as well as a business credit card because it is good to keep both transaction types separate for tax reasons. In the case where you begin your business journey on a personal credit card and you wish to transfer your balance to a business credit card, you should be capable of doing so without paying balance transfer fees.

4. Benefiting from Revolving Credit
Once your debt is paid off, you can reuse it because you have revolving credit which is true for both a business credit card and a personal one.

5. Advantageous Reward Programs
Be it cash back, airline miles, earning purchase points or discounts at certain stores, many credit cards offer interesting reward programs that can benefit your business, both in the short and long term.

6. Managing Cash Flow
Looking for ways to be more organised, stay atop your spending and keep an eye on your business’ cash flow? A credit card can do just that, especially if your card tracks different categories of spending. 

Cons to Using a Credit Card

1. Easy Loss of Control
Let’s be honest - a startup business can become really costly, really quick. As much as a credit card can be helpful, it’s also easy to lose control of high balances, missed payments, added fees and the related financial consequences. Misuse of your credit card will only cost your business an incredible amount of money, therefore it is highly suggested that you only rely on a credit card if you are a responsible user.

2. Low Debt Limit
Unfortunately, if you’re planning on using a personal credit card to finance your startup business, you’ll need access to a high credit limit. Startup businesses are expensive and if you end up with a personal emergency, you need to be capable of covering costs upon immediate use.

3. Incurring Too Much Debt
By using a credit card to finance your business, chances are, you’ll incur quite a bit of debt. Whether you like it or not, this can also affect your credit score, all depending on how you manage your financial responsibilities. When you are ready to take the next step with your business and request a loan or other type of business financing, you may see yourself refused due to incurring too much debt, notably on your credit card. 

In Conclusion

Ultimately, the pros and cons to using a credit card to fund your startup business speak for themselves. If it is your only option, it is definitely viable if you are financially responsible and are careful with the debt you incur. If you have no other choice but to use a personal credit card, be sure to transfer to a business account as soon as possible. Overall however, a credit card might not be the most ideal form of financing for a new business. Instead, take a look at other solutions that are open and might work for you.