If you're thinking about starting your own business, you know there are a lot of start up costs involved. Your first thought might be to take out a small business loan but in 2015, big banks only approved 22.8% of small business loans. Your business may be too new to be approved for a loan or you may not have enough personal collateral.
If you've tried to find outside funding and come up empty, you might be tempted to use credit cards to finance your business. Using a credit card gives you faster access to money than a bank loan might and it's more flexible. A bank loan will give you a set amount of money and you will be required to pay back a fixed amount each month. That can be tough if your business income fluctuates. The minimum due monthly on a credit card is almost always going to be less than what a monthly bank loan payment would be.
We all know that if we get behind on credit card payments it can be hard to catch up, especially if your new business is slow to generate income. But there are ways to use credit cards to get started. Here are 8 steps to wisely financing a business with a credit card.
1. Have a Plan
Even the best business ideas require a lot of planning in order to execute them and start making money. Before you quit your day job and launch a business financed on credit cards, have a business plan.
Finances should be the most important part of your business plan. While you can finance a new business on credit, this should be a short term solution. If a few months in it seems like you're going to need more time to start making money, start looking at alternative sources of money; a personal loan, a business loan, or taking on investors. If you keep financing everything on credit cards, you are going to owe a ton in interest and you will be in danger of maxing out the cards with no other means of financing.
2. Decide Personal or Business Cards
If you are going to use credit cards to finance your business decide if you're going to use a personal card or a card that is in the name of your business. Business cards are not subject to the same consumer protections that govern personal cards. The issuer can change your APR or tack on additional fees with no warning.
You as an individual will have a longer credit history and therefore likely a better credit score than as a business. This may give you a wider variety of cards that you can be approved for and you can find one that best suites the needs of your business.
A business card can give you access to a higher credit limit and rewards that are useful to business owners like discounts on travel expenses. Taking out a business credit card will start a credit file for your business and improve its credit score (as long as you are paying the bills on time), two things that are important if your business decides to take out a bank loan one day.
Using a business card to finance your business also protects your personal credit rating because you're not maxing out your own cards. Having a separate business card helps you keep an accurate record of your expenses. If you are using a personal card, it can be hard to remember what charges were for personal expenses and which were for business expenses.
3. Transition Quickly
If you were using personal credit cards in the beginning, switch over to a business card as soon as you can get approved. It makes record keeping easier and keeps the IRS off your back at tax time. You also don't want your personal credit affected by a business that takes a while to get off the ground or fails entirely.
4. Choose Your Rewards
Some cards have better rewards than others. Business cards will offer perks that can save a small business a lot of money by providing cash back on things like office supplies and telecommunication expenses. If you or your employees will be travelling a lot, get a good rewards card that lets you accumulate airline miles, hotel points, or gives cash back on gas.
5. Choose the Right Card for the Right Expense
If you have small expenses, office supplies, client dinners, the interest rate on a credit card is not such an important factor so you can charge day to day expenses on a card with a higher interest rate. But if you have big expenses, or you know that you won't be able to pay the full balance off relatively quickly, find a credit card that has a 0% APR introductory rate.
Some cards will give you that rate for as long as 18 months! This allows you to finance the startup of your business while paying no interest. Hopefully by the end of the 18 months, you will have enough income coming in to pay off the balance in full before the interest is applied. No bank is going to give you a 0% interest loan for 18 months!
6. Ask for an Increase
After you have made on time payments for several months, call your credit card company and ask for a limit increase. This will help your business in a few ways. Obviously it gives you access to more money but it will also improve your business’s credit score because it lowers your utilization (ideally your utilization is less than 20%).
7. Negotiate Lower Rates
If you have been making all of your payments on time but not paying off the balances in full each month, call up each credit card company and ask them to lower your interest rate. You'll be amazed at how many will comply. If they don't, threaten to cancel the card and switch to a competitor. There are dozens of credit cards out there, make them compete for your business.
Don't actually cancel the card though, just pay it off and stop using it aside from the occasional small purchase to keep the account active. Cancelling a credit card will lower your credit score because it will increase your utilization and lower your total number of accounts.
We all know that it isn't ideal to carry a balance but if you have a lower interest rate, it can give you a little breathing room while you get the business going.
8. Speak to Your Partners
If there is more than just you involved in the business, make sure everyone is on the same page when it comes to using credit cards to finance the business. Will you each use individual credit cards in your own names? When you open cards in the name of the business, will the accounts be joint or will one of you be the applicant and the other named as a co-signer or authorized user?
Who will be responsible for checking the credit card statements and paying the bills each month? If the business folds, how will the debt be divided? If you thought joining finances with a spouse could be fraught, that is nothing compared to joining finances with a business partner.
It Can Work
There are dangers involved when you finance a business using credit cards but it can work. Sergey Brin and Larry Page started Google in the 1990’s using credit cards and director Kevin Smith made Clerks using his plastic. It takes a certain amount of daring and a lot of planning but your big gamble might have a big pay off!