Hoping to start a new business in this new year? Finding the capital to begin your operations will be one of your biggest challenges. Some small entrepreneurs turn to their credit cards to obtain the cash and to buy the equipment they'll need to start operations. Could this work for you?
There are advantages. If you already have a credit card and a good credit rating, you know that you will be able to get the cash out and/or make the purchases that you need to get your business in gear. You don’t have that same kind of confidence if you’re applying for a loan from a bank.
You could find investors to help your start-up business, but you may not want to share the profits if you hit it big and/or take advice from them on how you should be running your business. (Plus taking money from family or friends can put a big strain on relationships.)
Charging business purchases to your credit card can also bring you some protections that you don’t get if you use a business credit card, since the provisions of the 2009 Credit Card Act apply only to personal credit cards. These rules make financing your business more predictable.
Finally you may be able to purchase some of your new business equipment without paying interest for a year or more if you open a new credit card that has a zero percent offer. Saving even a little bit of money can be important when you’re starting out.
There are drawbacks to using your credit cards to finance your new business, however.
First, when you use credit cards it’s easy to overspend and to go deeply into debt. You need to be especially wary if you’ve quit other jobs and have no means of paying back your charges unless your new business succeeds.
Interest rates on credit card purchases and on cash advances can go as high as 21 percent--much higher than the rate of interest on a small business loan. So financing your business using a credit card could put an additional strain on your company before it’s even a few months old. (There’s another advantage to applying for a small business loan as well; presenting the case for your business will require you to have a business plan and do the necessary calculations to make sure that you have a good chance of success.)
Overuse of your credit card can also harm your credit rating. Remember, banks like to see a low debt to credit ratio. If you’re maxing out every card because you’re charging your business expenses, you’re likely to find the interest rate on your credit card rising, which will cost you more in the long term.
The best approach for a new business owner is to use credit cards sparingly. Save them for an emergency or for when you travel (the monthly statements can help you keep track of expenses).
If you don’t have enough cash on hand now to start your business, save for a few more months or another year until you don’t have to tap into your credit card. If you do decide to look for investors among your family and friends, keep the agreements formal and in writing so that everyone understands what’s going to happen if your business succeeds (or if it fails).
Contact the Small Business Administration for assistance. The SBA advisors can review your business plan and tell you about the microloans for small businesses available through their agency.
The SBA website lists insufficient capital as one of the biggest reasons for small business failure. Give your enterprise the best possible start by knowing in advance exactly how you’re going to finance it—without relying too heavily on your credit card.