Getting a new business off the ground when you don’t have the necessary capital saved up can be quite tricky. Risk capital sources such as angel investors, and VCs give a hard pass to the large majority of small businesses, unless they have breakthrough ideas, or patentable IP to back the investment.
The same goes for banks, unless you have collateral, or assets, getting a loan for your business is tough.
In such situations, most budding entrepreneurs turn to the only source of capital that doesn’t ask too many questions, their personal credit cards.
Pros & Cons of Using Personal Credit Cards To Fund Your Business
In this article, we take a deep dive into the pros, cons, pitfalls, and other key considerations for financing your startup with personal credit cards.
Pros Convenience – The key case in favour of this is the ease of use, and convenience of the entire setup.
If you already have a personal credit card, there is nothing else required, and you can get started swiping to fund your business needs without answering to anyone.
No Collateral Requirements – As against a personal or business loan, you will not be asked to put up any collateral in the form of property, or inventory in order to secure the funds.
Revolving Credit – With a credit card, you essentially have a pre-approved line of credit, which when paid off, restores back to earlier limits, and can be used again, unlike a loan where a set amount is released, and an application has to be made for a top-up. This can substantially enhance the cash flow position of small businesses.
Rewards & Cashbacks – Most credit cards offer a wide range of rewards, bonuses, and cashback points, which can result in substantial savings for you and your business.
Balance Transfers – Once your business is setup, and you have a business credit card, the balance incurred on your personal card for all business expenses, can be transferred to the new card without any additional fees.
Cons Increased Personal Liability – One of the key advantages of a limited liability corporation is that total liability of a business is limited to the amount of capital invested by shareholders. The personal assets of the founder, partner, or other shareholders remain protected at all times.
This line, however, gets blurred when you start intertwining personal and business expenses, exposing your personal assets to liquidation when things get awry.
Potential For Abuse – The ease and convenience of credit cards can be a double-edged sword when users lose track of expenses, run high balances, and start missing payments.
High Interest Rates – Credit cards in general have higher rates of interest, and with no set repayment schedule, borrowers can end up with huge balances, with interest rates charged each month, making it one of the most expensive sources of funding for small businesses.
Other Key Considerations
Beyond the factors mentioned above, there are a few other considerations before you decide to take the plunge,
Applying For Multiple Credit Cards Can Lower Your Credit Score
Does opening a credit card hurt your credit score? Not particularly, but whenever a credit inquiry is made, it can result in a few points being shaved off your credit score.
Given the limited balances of personal credit cards, many first time founders apply for multiple credit cards, which starts ringing the bell at credit monitoring companies, often resulting in a big dent to your personal credit score.
Cash Advances & Related Fees
It is worth noting that all credit card transactions aren’t the same, and if a certain transaction is considered a cash advance, it might invite heavy fees, and transaction costs, making it quite expensive in the long run.
While using credit cards for business expenses, you must be aware of the type of transactions you perform, and how they are being classified by your card issuer.
Final Words
When starting a business, no matter how you decide to fund it, involves a risk, and while there are many successful entrepreneurs who pushed the limits of personal credit to get their businesses up and running, it is still mind-numbingly stressful to run a business by maxing out your credit cards
