When it comes to funding your small business, you have more options than ever before. You can go through a traditional route, such as applying for a bank loan or an SBA loan. You can turn to online-only alternative lenders, or apply for a specific-use loan through an avenue like equipment financing. Or, you can finance your business using a credit card.
You heard that right: a business credit card can be an effective way to finance your business.
You wouldn't be alone, either; credit cards are the third most popular form of small business funding. Business credit cards are especially popular in the startup phase of a company, and they can be incredibly useful in getting your business off the ground.
But we know that many consumers run into trouble when it comes to credit card usage--how can you be sure you won't misuse your credit card as a business owner?
Here is everything you need to know about successfully funding your business with a credit card.
Why should I finance my small business with a credit card?
First things first: why should you finance your small business with a credit card, anyway
Truth be told, maybe you should, but maybe you shouldn't. Before you decide what financing option is right for you and your business, you need to evaluate how much financing you need, how much you can afford to pay back and when, and how it's going to help grow your business.
A business credit card is an excellent financing option for new small business owners who may not have access to other forms of funding. Credit cards can work as a provider of short-term financing; after your billing cycle is up, you typically have around 30 days to make your payment (though this may depend on your specific credit card issuer), i.e. pay back the amount you spent. You will also always have access to your line of credit--no need to keep reapplying each time you want to finance something with your credit card. As long as you don't hit your credit limit, there's capital at your disposal.
Additionally, taking out a business credit card, using it regularly, and paying off your balance each month is a great way to build business credit. This will help make it easier to qualify for more serious financing down the line.
But, of course, financing a business using a credit card is not without its risk. Read on for more information on what it means to use credit cards to fund your small business.
Understand what's at risk--because it's not just your business.
You can use either a business credit card or a personal credit card to finance your business. However, regardless of which kind of card you use, you must remember who's responsible if something goes wrong--the business owner, AKA you.
While your business and personal expenses will be treated differently come tax time, as the owner of the business, you're still going to be held liable for your business' finances. Business credit cards also tend to require a personal guarantee, which inevitably intertwines your business and personal finances.
Additionally, while it's okay to finance a business using a personal credit card, mistakes can get messy down the line. If you spend too much and are unable to make your payments, that's not only going to put you into debt--it could negatively affect your personal credit score. And in the future, that potentially low credit score could ruin your chances of obtaining both personal and business financing.
Look for a good introductory offer, but read the fine print.
Many credit cards (both business and personal) come with 0% APR introductory offers. This means you could potentially finance your business interest-free for several months, or even as much as one year.
This seems like one of the best business funding deals out there because it is--even the most desirable term loans include some sort of interest, even if it's a low rate.
However, what about when that introductory offer is up? The interest rate will rocket skywards--and you may be unprepared for it. Most credit cards have APRs of at least 13%, with some as high as 20%. This means financing your business with a credit card could prove to be more expensive in the long term than finding funding through a small business loan.
It only works if your costs are relatively low.
You (hopefully) know this already, but financing a business is expensive. No matter what industry you're in, you can't make money without spending some first. From covering inventory and equipment to paying your employees, there's a lot more at stake than simply paying yourself.
Depending on your revenue, credit score, years in business, and many other factors, you could potentially qualify for a term loan for hundreds of thousands of dollars, if not more. Credit cards, on the other hand, have pretty low limits--none will likely reach any higher than $50,000, and most won't have limits nearly that high.
If your credit card is going to be your only means of financing your small business, make sure it's actually going to cover everything. You can try to cut costs as much as possible, but if your bare-bones startup costs are exceeding your access to capital, it's probably time to look for other options.
Take time to research and pick the best card for your business.
There are so many business credit cards flooding the marketplace at the moment. After a while, they all seem to sound the same--so much so that you'll be tempted to randomly pick one to apply for, and call it a day.
Don't blindly choose a business credit card. Sure, they may seem the same after a while, but each comes with its own APR (which could be variable or fixed), credit limit, payment terms, and so much more.
Additionally, if you're going to be using a credit card anyway, make sure you choose one that works for you. There are plenty of rewards credit cards out there that can help you earn back cash and rewards towards business expenses, such as travel and office supplies. Picking the right rewards credit card helps ensure you're getting the best bang for your buck.
Financing your business with a credit card comes with its risks, but these are easily avoidable if you use your card responsibly. If you're new to the business world and in need of some funding, a credit card may be your best option.