Many years ago lenders were more apt to take risks on promising small businesses. The change in the economic climate have forced them to reduce the risks they take and now loans for startups are a lot harder to come by. Although small business owners have been using credit cards to finance their business dreams for many decades now today the stigma associated with doing this have been removed as more and more successful businesses that were built on credit cards emerge.
There are a number of rewards and accompanying risks of using business credit cards to fund a business. It is an easy way to secure funding and the risks are well worth it if the business succeeds on the other hand if the business fails you can ruin your credit.
A Source of Easy Funding For New Businesses
There are numerous success stories of businesses built on credit card funding. Once cautious about using credit cards, due to the number of advice against doing so, business owners are gravitating towards this source of funding because of the ease with which they are able to secure it. The main reason for the increased use of credit cards is due to the economic downturn which have forced lenders to boast their credit standards which in essence puts a lot of small businesses out of the running.
Credit cards are used because they are available and they are easy to secure. With a good income and credit score business owners are approved for sums in excess of $50,000.
If you are considering using a credit card to finance your business here are the advantages:
- Use and pay interest only on the money you need. Much different to loans where you take out a huge sum that you don’t immediately use but still have to pay interest on it.
- Keep track of all your business expenses if you place all your purchases on that one card.
- Accounting becomes a lot easier since you can refer to your statements for your business expenses.
- Easier than using multiple checks for purchases.
- Rewards and discounts on purchases for your small business.
- No need to pay interest if you pay off your balance monthly.
There are risks associated with relying on credit cards but they can be minimized with proper management of the credit card. Below are a few tips.
- Read and understand the terms and conditions so that you are fully aware of the real costs of using the card.
- Look out for changes in the rates and terms of the card. Lenders can change the rates on the card without notice especially for business credit cards. Avoid sudden changes by making your payments on time and staying within the terms and conditions of the card.
- Stay away from cash advances. Do everything possible to avoid cash advances since they carry a higher rate of interest than regular purchases.
- For more expensive equipment make use of lease financing since the rate of interest will be lower than credit cards.
- If you can secure trade terms credit from your vendor, use it. This way you will pay less interest and have the credit card available for purchases where trade credit is not an option.
- Credit card financing should only be used until you are eligible for a traditional loan or if you have developed a policy of paying off your balance each month.
- Look for business credit cards with the best terms. Ideally the interest rate should be low with no annual fees. The card should also include at least 25-30 days of interest fee financing which will give you time to pay off your balance without accruing interest.
- Do not max out the card because it could have a negative effect on your credit score. It will also restrict your purchasing power.
- Pay more than the minimum required payment and develop a habit of paying off your balance in full whenever you can.
Being an entrepreneur means taking risks and using credit cards to finance your business might just be one of the many risks that you will have to take. Managed the right way the risk could pay off many times over.