Should I Finance My Business With Credit Cards?
It can be one of the riskiest moves an entrepreneur can make: using a credit card to help fund a startup. David Batchelor knew it was the kind of move that could either pay off big time, or leave him with credit card debt.
As the president and founder of DialMyCalls, a mass notification service used by school, churches, nonprofits, and other organizations to send phone calls or text messages to a list of phone numbers, he needed capital to invest in advertising to grow the business.
Credit cards weren’t his first choice for funding, but like many startups, he couldn’t get a traditional bank loan. In fact, the local banks he talked to (and he tried a number of them) wouldn’t even offer him a business credit card, so he used personal credit cards instead. “Being a new business can be really rough in that way,” he says.
Batchelor didn’t want to take an unnecessary risk, so he approached it very carefully. He ran small tests to make sure ad campaigns would be profitable before committing to a larger spend. “Once we knew a campaign was working, we’d continue to ramp up the ad spend while making sure it continued to pay out,” he says. “This way, we could keep reinvesting into the company and pay off the credit card bill each month without too much stress.”
Still, it was uncomfortable, and there was always the risk that campaigns would fail, but Batchelor kept plugging away, carefully testing and investing. Within a year he was able to pay off the initial balances, and since then pays his cards off in full each month.
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“This keeps you in check by not getting comfortable having that debt hanging over your head,” he says. “It’s easy to get into a trap where you hold a balance with the intention of paying it off down the road, but if things go bad or times get tight, that big balance can really be a burden on you.”
Want to leverage credit cards to finance your business like Batchelor did, without getting into trouble? Here are some tips:
3 tips to financing your business with credit cards
1. Become your own banker
When you apply for a bank loan or other types of traditional small business financing, the lender will scrutinize your finances and likely want to know how you plan to use the funds if you get the loan. You may even have to provide financial projections demonstrating that you’ll be able to repay the debt.
But credit cards don’t require such scrutiny. If you have credit available, you can spend it—even if doing so can hurt your business more than help it. You’ll have to be your own banker, and like Batchelor, avoid spending money foolishly (aka “gambling”).
2. Use the right type of credit cards
Business credit cards may be preferable to personal credit cards because most don’t report activity to the owner’s personal credit reports unless the account holder defaults. At times when you find yourself charging a lot or carrying a significant balance, you don’t have to worry that high “debt usage” will bring down your personal credit scores. (Debt is the second most important factor in your credit scores, after payment history, so this concern is real, especially for business owners, who often rely on strong credit scores for financing.)
Most national card issuers, as wall as some local banks and credit unions, base the decision to issue a card on the owner’s personal credit scores and income, which means even owners of new businesses have a shot at getting approved, provided they meet minimum credit score and income requirements.
3. Search for the lowest interest rates
While credit cards carry significant advantages, interest rates on business credit cards average 15% and can go much higher. You may be able to get a better rate by shopping for a low-rate card, or by using a low-rate balance transfer on one card to pay off another. Also, keep in mind that loans from banks and credit union loans (including SBA loans) generally carry lower rates and favorable repayment terms.
So while you’re building your business, make sure you are also building strong personal and business credit scores so when you need capital in the future, you’ll have more options available to you.
RELATED: 6 Tools to Help Entrepreneurs Build Better Credit to Access Financing
