To start a small business some amount of capital is needed. Depending on the type of business items like equipment, office furniture and supplies, money to pay employees and setting up an office space will be needed. Since small business loans are harder to secure for new business owners they inevitably gravitate towards the use of credit cards, either business or personal cards, to fund their startup.
Unless the business owner has a small fortune stashed away in the bank or is getting some sort of funding for the business he will need a loan to establish and build the business. Today, credit cards are the number one source of funding for new business owners. Even though there are hundreds of small business success stories of businesses built on credit card loans there are thousands more where this avenue failed leaving the owner buried in debt. Using the credit is just part of the puzzle you should also have a business plan and a well thought out plan of action to be successful.
Since a lot of consumers who are looking to start a business would probably already have a credit card or two they might just make use of this credit line to start the business. Others apply for business credit cards after registering their business so that they could immediately begin to build business credit. Which is the best option? I will explore them both below.
Personal Credit Cards
Using personal credit cards is the fastest and easiest way to get started with the business since most consumers already do have credit cards in their names. This can either pay off or land the cardholder in unwanted debt that if there is no way to pay off the balance can ruin the credit score of the individual. Alternatively that great sounding idea if given a chance can be the start of a future empire.
There are some disadvantages to using personal credit cards to fund a new business. For one the sudden and increasing charges to your account could prompt your credit card provider to lower your credit limit without warning. Aside from that there are consequences to maxing on your credit cards to fund a business. This drop in credit limit to credit utilization ratio can negatively impact your personal credit score and raise flags in the minds of your creditors.
Small Business Credit Cards
Even though small business and personal credit cards are very different the same caution needs to be applied in their usage. If your business has no credit history and no capital to fund the business any charges that you apply to the credit card, if you manage to get one, will be linked to your personal credit history. In fact business credit cards for small businesses with no credit history are usually issued based on the merits of the owner’s personal credit history.
Small business credit cards come with a number of risks that are not associated with personal credit cards. Since the regulations and rules of the Credit Cards Act do not apply to small business credit cards the convenience of the credit line extended are riddled with risks to the business owner. Some of the risks include sudden changes to the interest rates or credit card limits. The billing structure, minimum payments and balance interest calculations also can change without notice. Still a lot of business owners consider the benefits worth the associated risks. For instance the expense tracking benefits and the rewards that they could receive with reward type business cards more than compensate for any unforeseen risks.
Whatever route you decide to go you need to carefully research your options and when you make a decision make sure that it is an informed one.