Credit Cards or Family: Which Debt Is Best for Your Business?
You’re ready to start a business, or maybe take yours to the next level. You need financing, but don’t want to go the bank route, so you’re looking at two options:
- Charge expenses on your business credit card
- Borrow money from a family member
Both paths present their own benefits and drawbacks, and it’s important that you’re aware of what you’re getting into either way.
Credit Cards: The Gray Area of Business Financing
When I say “gray area,” what I mean is: there’s no simple answer to whether creating debt through credit card usage is a smart idea, and yet 37% of business owners use cards for financing. If you’re able to secure a card with zero percent interest, for example, it’s easier to justify using a credit card to cover business expenses. On the other hand, if you have a high-interest card, that debt could cost you significantly more than you budgeted if you take months to pay it off.
It’s also a matter of knowing yourself financially. Are you able to charge a business expense and then pay it back within the month? If so, you should be able to be fiscally responsible with credit card debt. But if you’re a “bury your head in the sand” type, you could quickly find that sand turning to financial quicksand, putting your business in jeopardy.
Tips for Getting the Most Out of Credit Card Financing
Start with a plan. There should be a set of expenses attached to a goal — for example, you’re launching your business and you need a computer and office supplies — that you need to finance. As best as you’re able, create a budget so you know what to expect.
Next, determine how long it will be before you can pay off this debt in full. A new business can’t guarantee profit in the near future, so take that into consideration. Now, look at your credit card’s interest rate and add that fee to your budget.
If you can secure a card with airline points or other rewards, you can make your debt work in your favor. Look as well for cards with low or zero interest, but be aware that some will start charging you a hefty annual fee after that introductory period.
Borrowing from Family: Mixing Business and Blood
Your other option, borrowing from family, is one not to take lightly. In the event that you’re not able to pay your monthly loan payments promptly, or if your business should fail, that lingering debt may negatively impact your personal relationship with the family member.
On the other hand, someone who knows, loves, and trusts you is more likely than a bank to offer you a cut-rate deal on financing, and if you’re lucky, they won’t even charge you interest. They won’t foreclose on your home if you miss a payment! The fact that 38% of startups borrow money from family
is a testament to the fact that it works.
Tips for Getting the Most Out of a Family Loan
If you want to go this route, treat it as a business transaction. Draw up a contract that outlines how much you’re borrowing, the interest rate you’ll pay, and when you’ll pay off the loan. Keep the business transaction separate from your personal relationship as best you can (and if you think your brother will hold the loan over your head every time you get together to watch football, maybe it’s not a good idea), and above all: pay the loan back on time!
Keep in mind that you do have other financing options, like venture capital, angel investment, crowdfunding, and working capital loans. Which you choose will depend on your financial status, your ability to repay the loan, and how much you need.
