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The Pros and Cons of Financing a Startup With Credit Cards

The Pros and Cons of Financing a Startup With Credit Cards

When you start a company, you may consider funding your business by using a credit card. What are the benefits and disadvantages?

  • When properly used If used properly, credit cards can prove to be effective financing tools for small-scale businesses.
  • Benefits of credit card borrowing include keeping control of the equity, gaining access to capital at a low cost and the ability to avoid collateral.
  • The negatives of borrowing could be for problems with credit, liability not enough funding, and challenges to qualification.
  • This article is intended for entrepreneurs thinking of the use of credit cards to pay the costs of starting their business.– You’re thinking of using a credit line to help finance your business? For certain entrepreneurs, it’s the only option to get your start-up off to a good start. The poll conducted for 2020 conducted by market research firm Clutch discovered one-third of respondents relied on plastic as the initial capital needed for their business.

Based on Odysseas Papadimitriou who was a former Director of the senior level for Capital One, financing a new venture using credit cards can be a good idea however, it’s also it can be risky. Papadimitriou is now the CEO and co-founder of credit card comparison website WalletHub has given us the details on how to charge business expenses using credit cards.

Benefits of using credit cards for starting capital

While it could seem like a gamble to take out money to fund your new venture however, there are a few excellent reasons to borrow.

“The advantages of using credit cards to finance an initial startup go beyond the convenience, even though it is definitely a element,” Papadimitriou said. If you choose to use the card you already have or request a new one The benefits are huge.

Maximum equity

In general, those who are willing to risk the dangers that come with the creation of a new business believe that they have an opportunity to make money in their possession. Being in control, then is attractive.

The more you can develop your business idea with no outside financial assistance, the more of the equity in your business you’ll have to hold for yourself and the less oversight you’ll need to manage. If you’re using credit cards and your company’s interest remains with you.

Low- or no-interest deals

The widespread availability of interest-free rates resulted in it becoming usual banks to provide attractive packages to creditworthy people or business people. A lot of credit card issuers provide no interest for a short period of time. Certain are only for purchases made and others are for balance transfer.

Eliminating financing costs for up to a year on purchases that are due or have already been made will benefit your business’ bottom line. One example that is compelling can be the Slate Edge by Chase, that offers zero percent APR on balance transfers and purchases over the course of 18 month. Also, there is no balance transfer charge, which is usually 3percent of the amount that you transfer.

No collateral requirement

Get an enterprise loan or line of credit through a financial institution and be ready to offer collateral for your property or inventory, as most of these are secured. But, most credit cards are not secured which means you don’t have to raise funds in order to access this line of credit. (Related to: What is an unsecured business loan? ]

The disadvantages of using credit cards to kick-start your business

There’s numerous potential issues related to financing a new venture through a credit card. It is important to understand the details before making an application and using a credit card to get your company up and running.

Personal and business expenses are intertwined

If you utilize credit cards to finance an enterprise there is a risk that the distinction between personal and business finances may be blurred. It is important to keep these modifications distinct and that requires commitment. If they mix, your tax returns will be off making tax filing more difficult because you’ll have to go through the line items to find the tax-deductible expenses.

Potential credit score damage

However confident you believe your business is going to be successful almost all businesses are risky. When you utilize credit cards to fund your business it is a gamble on your credit score. Every transaction you make with the account will show in your credit report, and if you are charged excessively or fail to pay your bills, your score will decrease. This could put you in a difficult position in the event that you wish to apply for credit options.

Personal risk in the possibility of a lawsuit

If your business doesn’t make it the debt that you have incurred by using the credit card is your legal and financial obligation. Collectors might try to recover the amount owed, not just from the assets of your company, as well as your personal assets and income. If you fail to pay the obligation, you could be accused of a lawsuit for the balance that is not paid.

There is no guarantee for the lender

If you are eligible for a commercial credit card lender will look at not just your capacity to pay, but also your credit score. If you’ve had issues when it comes to credit or have had credit issues in the past, your credit report and credit score may be in a bad state. If this is the case you might not qualify for the top credit cards that can aid in the creation or expansion of your company.

Low limit

Since credit cards are usually not secured, the issuer has to take significant risk when it grants the credit line. This is why spending limits could be lower than for secured lines of credit and loans of credit. Credit cards typically limit their use when they reach the threshold of $50,000. If you’re looking to borrow an amount of money the credit card on its own will leave you with vital funds.

Overextension is a problem

Overspending more than you could be able to pay back within the shortest time frame isn’t a big deal when you use credit cards. If you do this, you’ll be in the midst of debt that could last for many years. Since many credit cards come with high interest rates along with rates of interest, cost of financing can make the debt costly. In addition, if you want to take advantage of various financing options, that credit can render you unqualified specifically for loans with more favorable conditions.

How can you finance your startup using a credit card

If you’re still planning to fund your business using credit cardhere’s a few suggestions to go about it right.

1. Create a charging plan.

Before you make one charge, you must decide what you will use the credit card intended to be used for. You might want to use it only for specific expenses like marketing or shipping. Whatever you decide to do, don’t put everything in the credit card and expect the most optimal. If you choose to open a zero APR credit card, you will have greater flexibility when it comes to crediting and rolling over balances, but be sure that you pay off the debt prior to the time that the rate starts to increase.

2. Take on short-term debt.

It is a good idea to pay your entire balance before time of due. In doing this you’ll be guaranteed the benefit of a 30-day loan with no interest. There are times where you’ll need to make a payment over time however, don’t make the timeframe beyond 3 or 4 months. Determine how long it will be to eliminate credit card debts in a couple of installments and then stick to the payment plan until you’re back to zero amount.

3. Maximize your rewards.

A reward-rich credit card could be a business’s ideal friend. If you are given a card with a welcome bonus, you’re already off to a profitable beginning. Pay for a costly purchase and the card issuer will offer you a significant amount of cash or points.

For instance, Bank of America’s Business Benefit Unlimited MasterCard Cash Rewards gives the option of a $300 statement credit following the charging of $3,000 during the first 90 day after having the card opened. Whatever rewards card you choose to get make use of it in accordance with your plan for charging to keep the rewards flowing. If you pay off the balance prior to when interest is accrued You will gain from this process.

Alternatives to financing your start-up using credit cards

While credit cards are an great additions to your business bank account There are many other options you can explore.

Personal capital

Don’t look past your personal financial capabilities. If you have some money saved in savings or the investment accounts, think about using it. You could also make use of any equity you have in your property through an equity line of credit (HELOC) or even sell important items and then use the profits to pay certain expenses. In actual fact, the more of your own money you allocate to your business, the more careful you’ll be spending it.

Business credit

A business loan you get from a credit union, or online lender is ideal for big expenses that you’d like to pay in time, such as upgrades and expensive equipment. The rates of interest are generally lower than those for credit cards and the fixed monthly payments eliminate the uncertainty of what you must make each month. Find out what’s currently on the market with our guide to the most suitable business loans for 2022..

Family members and friends

People who are genuinely happy and trust your business may loan you money to fund your business. It is important to be cautious with this kind of loan however. If the loan doesn’t go as planned and you’re unable to repay the loanee the trust of your relationship could be at risk. Every party must remain on the same side. Note all the terms down, including the purpose you’ll utilize the money for and the time and date you’ll pay it back. Both parties must confirm the document and save an original copy.

Outside investors

Another option for funding is to find wealthy people to become an angel investor in your venture or an venture capital company that is willing to invest in your business in exchange for the opportunity to own a stake in your company.

Crowdfunding websites such as Kickstarter and Indiegogo are yet another method to earn spending money. For the reward, you could need to give your supporters goods, equity or even an interest payment on the loans.

Finding the best funding option for your small-scale company

Whatever way you choose to get the money to start your venture there are pros and pros and. Any method that is throwing money into a business will not guarantee that you will succeed.

“Efficient utilization of the money and lots of work and a bit of luck are crucial,” Papadimitriou said. A prudent approach to borrowing is probably the most effective option.

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