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Should you fund a start-up with a credit card?
Blair Thomas, co-founder of eMerchantBroker.com, weighs up the pros and cons
February 16, 2014 9:41 by kippreport
When it comes to financing a start-up, most find themselves stuck between the proverbial rock and a hard place. While some start-ups are lucky and attract angel investors or have access to money from friends and families, the vast majority of people are on their own, at least at first. That is why it is so tempting to use credit cards to jump-start a business. Entrepreneurs, both new and seasoned, who have maxed out their cards, warn that, while it may be necessary, it can also be disastrous if you are not careful.
Besides providing the needed cash flow to young businesses, credit cards can also improve credit scores for owners and businesses alike, as long as payments are made on time. There are also special rewards, such as air miles, discounted gas or even cashbacks to tempt customers. These funds are also easier to come by, which can help in a pinch. Many credit cards take only seconds for online approval, which, to many, is better than having to wait for a bank to return your call on your loan approval. Embracing business credit cards for daily expenses can also aid in record keeping by helping owners separate personal and official finances, track employee spending, reduce time for balancing cheque books and produce financial reports.
However, credit cards’ interest rates are much higher than traditional loans, which make them a pricey form of debt that will drag a business down during tough times. In addition, sometimes these rates can increase if payments are not made on time. So, it is no wonder that the Ewing Marion Kauffman Foundation has found that, for every $1,000 in credit card debt that a small business takes on, its chances of long-term survival fall by more than two per cent. The majority of businesses have start-up and operating costs that can lead to tens of thousands of dollars.
For a young company, it is crucial to tap into personal funds from family members, friends and other investors to avoid racking up too much credit card debt. Such high-interest liabilities will swallow up a young company’s revenues. If you’re late on payments, you can damage your credit score, thus hurting your ability to take out loans as the business grows. A late payment on a small business’ credit card also gets reported to a business credit bureau. However, for many entrepreneurs, a credit card may be the only way to go. It is quicker to obtain money than a bank loan and various rewards offered can often be beneficial.
There is no clean-cut answer to how one should fund his/her business. It is simply up to the owner to weigh up the pros and cons of using credit cards and loans to see which option is the best for them and their company.