When you’re thinking of ways to get your business off the ground, you may be cringing at the idea of endless loan applications and the interminable waiting period to see if you’re approved. If you’re racking your brain trying to come up with a different route that doesn’t require so much time and hassle, you may be ready to consider using a credit card to fund your business.
Paying for your business capital using personal or business credit can have some huge perks, especially if you’re on top of making your payments and have a lucrative business. However, as great as the advantages are, there are also some weighty drawbacks to consider. Read on to see how these pros and cons measure up, so you can choose if this method is going to help or hinder you in the long run.
Why You Might Use a Credit Card
There are a number of reasons one might consider using a credit card as business funding. First, if you’re at the very outset of your venture, you may not have the credit score or business assets to qualify for a small business loan. But if you happen to have a credit card with a reasonable limit, that’s quick access to funds with no need to apply for a loan.
Also, using a credit card for all of your business expenses may benefit you in that it helps you build up your credit score so that you can get a loan in the future. It’s in your best interest to have a decent business credit score so that funding and investors are more inclined to help you if you need it, so this is the perfect way to get that train out of the station.
Pros of Using a Credit Card
Now that you know some of the reasoning behind using a credit card for your business, here are some of the benefits that come with this method.
- Quick and easy: As mentioned above, a credit card is far easier and quicker to acquire than a loan – and if you already have one, there’s absolutely no downtime involved.
- No collateral required: If you’re a young business, you may not have any collateral whatsoever. This puts you in a pickle when it comes to securing a loan. A credit card doesn’t require any collateral, so you can start right up without trying to scrape by until you have enough assets to show to a loan company.
- Possible lower rates: There are tons of 0% APR credit card offers out there, which may mean you can fund your business with much lower interest than you would find on a business loan.
- No sharing ownership: If you’re the only one pouring into your business, you retain full control. A credit card can give you a boost of initial cash so you don’t have to parse out shares to gain investors.
- Build up your credit score: If you’re diligent and responsible, starting your business with a credit card can ramp up your credit score and allow you more flexibility in future funding.
Cons of Using a Credit Card
Now that you know the benefits, it’s important to keep in mind some of the potential problems that can come with funding your business with a credit card.
- The liability factor: If you find yourself unable to make your payments, it’s your own credit score that takes the hit and you’re personally responsible for the debt incurred.
- Less funding: Because credit cards have lower limits than business loans, you may not have enough money available to get your business going.
- Mixing personal expenses with business expenses: Using your personal credit card can make for a messy credit statement, as you’ll see both your personal and business expenses all lumped together. This creates problems come tax time, as it’s hard to sort out what’s business-related and what’s not.
- More expensive: A credit card can end up being more expensive if you aren’t able to find one of those 0% APR deals, and if you start having trouble paying it back you can incur late fees on top of your normal monthly payments.
Alternatives to Using a Credit Card
As you can see, there are a lot of factors to consider in using credit cards for business funding. If you’re not quite ready to take the plunge, there are many online lenders and other bad credit business loans out there that can help you get the capital you need without putting you personally at risk. StreetShares offers completely transparent business loans and lines of credit to small businesses who have been operating for a year or more and making at least $25,000 in revenue. Contact us to learn more.
This is a guest post by Marc Prosser. Marc is the co-founder and managing partner of Fit Small Business, a site that provides reviews and articles for small business owners. Prior to starting Fit Small Business, Marc was the CMO of FXCM for ten years. He joined as FXCM's first employee and grew the company to more than 700 employees.