Using credit cards to start a business is nothing new. In fact, I’ve got a friend who is using a 0% balance transfer business card to fund a product based business he’s just started. When all is said and done, he’ll be in credit card debt of more than $30,000. Now in his case, he has the means to pay off the credit card even if the business fails. But as reported this week in the Washington Post, some small businesses are starting to drown in credit card debt.
So in this article we’ll look first at why people are turning to credit cards to finance their businesses. As it turns out, credit cards do offer a number of benefits to small business. Then we’ll look at how to reduce some of the risks of credit card financing.
The Rewards of Credit Cards for Small Businesses
There are four basic reasons many entrepreneurs turn to credit cards to finance a small start-up.
First, accessing cash through credit cards is easy and convenient. You can now apply for credit cards online in a matter of minutes. And if you have solid credit history, you can easily qualify for tens of thousands of dollars in credit.
Second, many credit cards come with 0% introductory rate offers on both purchases and balance transfers. These offers enable new companies to finance start up costs without paying interest. With some cards, you can get a 0% interest rate for up to 21 months.
Third, business and personal cards come with many rewards and cash back offers. It’s not at all uncommon to find cards with cash back offers on gas, office supplies, and computer purchases. These cash back offers can go a long way for a new company.
Finally, other means for raising capital have become harder to access. With the credit crunch we’ve experienced over the last year, it has become harder and more time consuming to obtain home equity lines of credit or small business loans. As a result, more and more business owners are turning to credit cards to get them through a cash flow crisis.
Avoiding the Pitfalls of Credit Card Financing
The ease of obtaining cash via credit cards also presents the biggest risk. More and more business owners are getting in over their heads as their credit card debt increases. So what are some of the ways you can reduce the risk that this will happen to you? Here are a few suggestions:
First, don’t spend more money just because you are putting it on a credit card. Study after study shows that we tend to spend more money when we use credit cards than when we pay with cash. If you’re using credit, ask yourself if you’d still make the purchase if you were paying with cash.
Second, make business decisions independent of your source of financing. Some folks tend to take bigger, unjustified risks if they aren’t using their own money. While the credit card company may be funding your business at the start, you’ll eventually be paying the tab one way or another.
Third, budget, budget, budget. Budgets are important for personal finance, but they are absolutely critical for a business. Set out your budget before you starting spending money and raking up credit card debt.
Finally, don’t get carried away with credit card rewards. Sure the cash back offers and discounts are nice, but they should never be the motivation behind the purchase.
Business and other credit card offers can be a great way to finance a new company, so long as care is taken not to over extend yourself.