Are you financially strapped? Are you using plastic to support your startup?
I've seen a lot of people finance their business with personal credit cards. Heck, I still do it sometimes. So I thought I’d examine the ramifications of financing a business this way and discuss its downsides and alternatives.
First, a note. In using credit cards to finance your business, you must be realistic. Expect things to go awry, such as a customer not paying you or your inventory not selling. The more prepared you are for the downside, the safer and stronger you’ll be.
Financing your startup with plastic
It’s quite easy to get $70,000 in available consumer credit if you have a decent FICO credit score. A FICO score is a measure of your creditworthiness as determined by a proprietary algorithm. Most lenders use it.
If your FICO is 700 or above, you may end up with a lot of credit card offers in the mail, and simply by accepting them, you can have a lot of credit.
I know someone who has $250,000 in credit card debts. They just accepted all the cards offered and used them to charge various business expenses. The business went south and they’re buried in debt.
The downside of using credit cards for your business is that you’re typically required to be a personal guarantor and thus are personally liable for your business debts. That has a way of keeping you up at night.
Plastic isn ’t all bad
If your business-financing needs are modest, putting your business expenses on a credit card is worth considering. You don't need to apply for a loan. You don't need to take in a partner. You avoid a lot of issues and strings that are attached to other forms of financing.
Another good reason to finance your business this way is that you get perks like frequent-flyer miles. If you need to travel on business you may find that hotel points are also very valuable for last-minute travel. You can get free travel if you use your card a lot for business. This feature is perfect if you pay off your card every month.
I also vastly prefer paying vendors with credit cards because you can have recourse if a service is not delivered or its quality is not up to your standards.
I once bought $40,000 per month of radio advertising from a media buyer only to discover months later that we were hideously over-charged for airtime we didn't receive. We contested the charges, and at first, the credit card company first said I was in the wrong.
Talk about sleepless nights. I was so upset.
But then I pressed my case by going up the bank’s chain of command. After a few letters, the $40,000 charge was removed.
But what if you don't pay off the credit card each month?
Then the interest rates rise very high, and they probably offset the benefits of the free airfare or hotel room.
There are, however, intelligent ways to use credit cards for business. Here are three suggestions that will help you.
Three ways to intelligently use credit cards
- Keep separate cards for business and personal expenses. If you are audited, you want to expose only the financial records required. If everything is on the same card, it mixes up expenses and forces you to disclose more than desired about your finances.
- Consider doing interest-free balance transfers and playing the free interest for as many months as you can. You can save a lot of money this way.
- Keep some spare cash in a separate account so you can make the payments on your credit cards, even if your business isn't producing cash flow. I don't know how many times this has helped me weather a storm. If you get credit card checks, then deposit some money into your account and use this to service the debt while you are waiting for your ship to come in.
- It’s okay to use credit cards to fund your business.
- Try to use credit cards that give you free travel, and consider those that give you hotel points instead of airline miles because hotel points are often easier to use in real life.
- Keep cards separate – business versus personal – so you can expose your business records and maintain your personal records as private.