The Basics of Using Credit Cards to Fund Your New Business
What it is: Credit cards can provide easy money for young, growing companies. But they also come with serious dangers.
How it works: There are personal credit cards, and there are cards tailored toward small businesses. Each come with benefits and rewards. There are more government protections for personal credit card holders, while business cards can have higher limits and rewards such as discounted office supplies that are tailored toward business owners.
No matter what, you will wreck your personal finances if the bills aren't paid, so don't be tricked into thinking you need to use a business card with the business.
Upside: Besides providing needed cash flow to young businesses, credit cards can also improve credit scores for owners and businesses alike -- as long as payments are made on time. There are also special rewards and perks such as airline miles, discounted gas or even cash.
The funds are also easier to come by, which can help in a pinch.
Embracing business credit cards for daily expenses inside the business can also aid in record keeping by helping business owners to separate personal and business finances, track employee spending, reduce time balancing checkbooks, and produce business financial reports.
Downside: Credit card interest rates are much higher than traditional loans, which can make them a pricey form of debt that will drag the business down during tough times.
It is little wonder that the Ewing Marion Kauffman Foundation has found that for every $1,000 in credit-card debt that a small business takes on, its chances of long-term survival fall by more than 2 percent.
For a young company, it is crucial to tap personal funds, family, friends and other investors in order to avoid racking up too much credit card debt. Such high-interest debt will swallow up a young company's revenues.
Getting late on a payments and you can damage your credit score, hurting your ability to take out loans as the business grows. A late payment on a small business credit card also gets you reported to a business credit bureau.
- Review sites such as CreditCards.com,CardRatings.com and Bankrate.com provide online tools to compare interest rates, rewards programs and annual fees.
- You could get burned on a small business credit card if you don't scrutinize the fine print and ask a lot of questions. Such cards are not covered by the 2009 Credit Card Accountability, Responsibility and Disclosure Act. The law protects consumers from such practices as arbitrary interest-rate increases.
- If you think you won't be able to pay off purchases in a single billing period, it might be better to charge them on the personal plastic, rather than a business card.
- Don't just hone in on annual fees. Check out baggage insurance, concierge service, employee-expense tracking, and even access to airline clubs.
- Search out the business cards with the best rewards in order to make something back on the business' purchases.
- Take advantage of introductory zero-percent rates on both purchases and balance transfers.
- Use different types of cards for different types of transactions. For example, a business-rewards credit card might be best for everyday expenses, while a zero-interest personal card might be the best for funding.