If you’re contemplating using credit cards to fund a business, then these points will help you make the right decision.
Credit cards can either be your best friend or your worst enemy. It’s been rumored that Sergey Brin and Larry Page used credit cards to launch Google in the mid-nineties, buying used computers and other equipment. Obviously, that decision paid off big time for them! But on the flip side, for every success, there are tons of disasters people experience by getting in over their heads with credit card debt to fund a business.
1. You will be personally liable for any debt
Whether you plan on using a personal or business credit card is irrelevant when it comes to risks. Why? Because nowadays, both types will be based off your personal credit file. So if anything goes wrong down the road, it’s going to come back and ruin your credit regardless of what it’s a personal or business card you’re using.
In order to get a card without a personal guarantee, practically ever card issuer require your company to have an established credit history, with the 2-3 most recent years having annual revenue of at least $2-5 million. Obviously as a startup, you’re not going to have that!
The lesson? You need to weigh the debt (and risks) the exact same way you would with personal debt… because ultimately that’s what it is.
2. Hope for the best, but be prepared for the worst
My latest web venture (launched in ’08) was actually funded using a credit card. I had to buy the domain for CreditCardForum – which at the time – was a lot of money for me. So I applied for a 0% balance transfer card and used that money to buy the domain. I had 0% for 12 months, so the game plan was to pay off the balance before the promotion was up.
That was in the spring and we all know what happened in the fall of ’08! As the economy crashed, the banks ceased the affiliate marketing of credit card offers… so here I was with a credit card website and not really any good way to monetize it. However this wasn’t the end of the world for me, because even though I hoped for the best, I was prepared for the worst (or at least, as much as one reasonably can be).
Even though my website stopped generating revenue, I had planned for that before I even made the domain acquisition. In short, I thought up a “worst case scenario” of what would happen if my business either (a) failed completely, or (b) took longer than expected to earn reasonable revenue. The latter of which occurred during the financial crash, but that was okay in the sense that the money I invested into my business was a lean amount – still very manageable, even with little to no revenue.
Will you be using credit card funding with the same mindset? Or is the amount so high that it’s an “all or nothing” gamble you are taking? There’s nothing wrong with swinging for the fences – but at the same time – it’s important to be prepared no matter what circumstances may come your way. Make your decision rationally, by carefully balancing the risks vs. rewards.
3. Consider all your options
Obviously if you go the credit card route, you will have to carefully research the various card offers on the market. But why stop there? Before you apply for any card, you should also consider other means of financing such as SBA loans, mortgages, and more. Because depending upon your circumstances, you might find that going a different route may work better.
For example when it comes to credit cards, the max amount you will be able to borrow probably won’t be very high… perhaps $10,000 to $20,000 at most (and that’s assuming you have excellent credit). So if you need more – and – can handle more than that, you might have to look elsewhere. If you have equity in your home, re-financing your mortgage might be a way to obtain a larger sum of money.
Another scenario where credit cards are not appropriate is for long term financing. In a worst-case scenario, how long will it take to pay back the debt? If the timeframe is 24-36 months or more, then a credit card would be a risky proposition. Why? Because after a 0% promotion expires, then you will probably be left with a rate of 15-20% or even higher. Paying that for any extended period of time could lead to financial disaster. So you may be better off locking in a lower APR on a fixed-rate loan, if it might take you a while to pay it off.
When used strategically under the right circumstances, credit cards can be a good way to fund what may very well become a successful business for you. But it’s important to not get in over your head by borrowing more than you can handle.
Would you fund a business with your credit card?
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