Starting a business is an exciting venture, but it also comes with a plethora of challenges, not least among them securing adequate funding. In a previous article, I discussed the pros and cons of business loans and lines of credit. Here, I’ll cover another funding resource: credit cards. However, the thought of using credit cards can be scary, especially since they often come with high interest rates and personal guarantees. So let’s explore what you need to know about using credit cards to fund your business, so you can do so wisely and with as much ease as possible.
To begin, there are two kinds of credit cards entrepreneurs can use to fund their business: business cards and personal credit cards. Let’s start off with business cards.
Understanding Business Credit Cards
Business credit cards are specialized credit lines designed to meet the needs of businesses, ranging from small enterprises to large corporations. These cards offer several benefits over personal credit cards, including higher credit limits, rewards tailored to business expenses (such as travel, office supplies, or telecommunications), and valuable reporting features that can simplify accounting processes. Some business cards won’t report on your personal credit, either, but you’ll need to research to find them, and there may be certain qualifications you must meet. A trusted business advisor can help you figure it out.
There are many good reasons to use business credit cards. Among them are:
Ease of Access: Compared to traditional business loans, which require a detailed business plan and substantial credit history, business credit cards are relatively easy to obtain and may be the only choice for brand new entrepreneurs. They can provide immediate access to funds, which is invaluable in the early stages of a business when you need to act quickly.
Flexibility: Business credit cards offer flexibility that other types of business financing do not. You can choose how much to spend up to your credit limit, and how much to pay off each month, as long as you make the minimum payment. This can be particularly useful for managing cash flow in a startup, where expenses can be unpredictable or variable.
Build Credit History: Regularly using and paying off a business credit card can help a new business build a credit history. This can be beneficial for securing larger loans in the future, as lenders will see a proven track record of creditworthiness.
Rewards and Perks: Many business credit cards offer rewards programs that can save money and give you access to special benefits, and who doesn’t like a few perks now and then? You might earn cash back on purchases or points that can be redeemed for travel, hotel stays, or other business expenses. Additionally, perks like insurance coverages, extended warranties, and emergency travel assistance can be incredibly beneficial for a new business.
As with anything else in life, there are two sides to every coin. So, as the informed business owner that you are, you should be aware that there are some downsides to using business credit cards. They are:
Higher Interest Rates: Business credit cards typically feature higher interest rates compared to other business financing options, like loans and lines of credit. If balances are carried month to month, the accrued interest can substantially increase overall debt and negatively impact cash flow.
Personal Credit Risk: The requirement for a personal guarantee on most business credit cards means that the business owner’s personal credit is at risk. If the business fails to keep up with payments, it can damage the owner’s personal credit score, affecting their ability to obtain personal financing and impacting personal financial stability.
Over-Reliance on Credit: Having easy access to credit can lead business owners to accumulate excessive debt, particularly during early stages of business when cash flow management is still stabilizing. This over-reliance can lead to financial strains and can create a cycle of dependency on credit for operational needs.
Knowing all this, it should be clear that in order to use credit cards wisely, you must be cautious and strategic. So let’s discuss how to go about securing business funding with a business card in a way that sets you and your business up for success.
How to Use Business Credit Cards Wisely
Before applying for a business card, make sure you have a plan and an intention for how you’ll use the card. So first, it’s important to assess your business’s specific needs. What you will use the card for, and what kind of rewards or benefits are most relevant to your expenses? Knowing the answers to these questions will help you determine what card is best for you, because not all business credit cards are created equal. Compare different cards based on their features, including interest rates, credit limits, and annual fees. Tools like online comparison sites can be helpful in this process.
One consideration most business owners don’t think about is how their personal credit score has an impact on securing the business funding they need. When it comes to credit cards, your personal credit score can be a significant factor in determining eligibility, especially for a new business without its own credit history. Ensure your personal credit is in good standing to increase your chances of approval. If it isn’t, work on that right away. Seek the help of a trusted advisor if you need it.
The good news about using business credit cards to invest in your business, rather than personal cards, is that the credit usage doesn’t appear on your personal credit report. On the other hand, if you use 30% or more of your personal credit, your credit score will decrease, making it harder for you to get credit. You don’t have that same worry with business credit cards.
When you’re ready to apply, be prepared to provide complete and accurate information. You’ll need documentation about your business, such as its legal structure, EIN (Employer Identification Number), and financial statements, if available.
Finally, and it probably goes without saying but is worth repeating, once you’re approved for a business card, use it responsibly. Pay on time. And always, always, always (and always, always a few times more) keep your personal and business expenses separate. Not only does this make bookkeeping easier, but it will also protect you from potential lawsuits.
What About Personal Credit Cards?
Business credit cards are specifically designed for company-related expenses, but new business owners might sometimes use their personal credit cards, particularly in the early stages of their business. This may be convenient because personal credit is immediately accessible, especially if the business’s creditworthiness isn’t established yet. However, using your personal credit has significant downsides. Using personal credit cards for business expenses can complicate your bookkeeping, making it tough to separate personal and business expenses, which can cause issues during tax time.
Relying too much on your personal credit can also hurt your personal credit score, especially if you use a large portion of your available credit or miss payments due to high business costs. In fact, if you use 30% or more of your personal credit, it can make it more difficult for you to obtain business credit. Therefore, while personal credit cards might work as a short-term solution, and it may be the only option at first, it’s better to switch to a business credit card as soon as possible. This helps keep your personal and business finances separate, protects your personal credit, and helps you build a credit history for your business.
We Can Help You Make an Informed Choice
Securing funding through credit cards can be a strategic move for new business owners. With careful selection, responsible use, and diligent management, cards can not only ease immediate funding woes but also support long-term business growth by building credit and managing cash flows effectively.
As your Creative Business Counselor, I’m here to serve as the trusted advisor you need to ensure your company’s success. That means I can help guide you to make informed, educated financial decisions for your business. You don’t need to go it alone.
