Financing a business with credit cards is often considered risky business, but when managed wisely, business credit cards offer savvy bootstrappers fast, flexible, and responsible financing. You just need to be smart about it.
The perks of credit card financing are obvious. You can spend up to the limit, pay it back, then borrow again without reapplying each time you need cash (like with a business loan). And you aren’t sacrificing equity or required to put up any collateral.
What’s more, using a credit card can help you organize and track your spending as well as establish good business credit, boosting your eligibility for a future business loan.
The risk of financing a business with credit cards includes personal liability and a damaged credit score, in addition to high fees and interest rates. But with the right planning, organization, and discipline, they can be the stimulus package your business needs to get off the ground.
Here are six ways to help you responsibly finance your business with a credit card:
1. Look Before You Leap
As you weigh your various options for funding your business, it’s important to understand where credit cards fit into the funding hierarchy. While traditional small business loans carry the best rates, they can also be time-consuming to apply for, and may require your business to put up collateral or show several years of profitability.
If you don’t qualify for these loans or need quick access to cash, business credit cards can offer valuable solutions, as well as cash-back perks and low-interest introductory periods. It’s very important to evaluate your business needs before deciding which one to use to finance your business.
Financing a business with credit cards are ideal for business owners with good credit who need to make small purchases, but they can be a viable option for business owners along the credit spectrum. Typically, cards also offer lower interest rates than other small business financing options like alternative lenders.
If you’re still in the planning stages of launching a new business, early financing using a personal card is the smart, safer option. Business cards don’t offer consumer protections against sudden rate hikes and often have lower rates for longer introductory periods (up to 21 months, compared to 9 –12 for business cards). They also require a personal guarantee that makes you liable for your company’s debt.
That being said, you should still get a business card when profits start rolling in. While business cards require more responsibility and careful spending, they also offer more perks, significantly higher credit limits, and the ability to establish business credit. All of these will make it easier to apply for business loans in the future.
Remember to separate your business and personal expenses as clearly and quickly as you can (using a business card will force you to do this). Know how you will use the card before applying, and have a realistic idea of how you expect to pay it off.
2. Shop Around
Before applying for a business card, make sure you understand their introductory offers, terms and conditions, and rewards programs. Knowing how you’ll use the card and pay it off will help you make the savviest choice for your business.
For example, some cards have higher interest rates but lower annual fees, which is ideal if you plan to pay the card off each month. Other cards will come with introductory offers that include cash rewards for high spending in the first several months. If you plan to incur large costs during a specific period, take a look at cards that will essentially refund a portion of that spending.
On the flip side, watch out for rewards that sound appealing but that you won’t actually use. Frequent flyer miles and hotel discounts might be great in theory, but not if you’re paying higher fees and don’t foresee any travel.
3. Get (and Stay) Organized
Whether you use a personal card, a business card, or several cards for different things, the key to responsibly financing a small business with credit cards is organization.
Depending on each of your card’s terms and conditions, you could be paying hugely variable fees for the same services (like cash advances or balance transfers). It’s important to do your due diligence in order to maximize the benefits of each card.
Keep a close eye on APR. Though most rates won’t go up more than a few points each year, small businesses aren’t protected from large rate spikes, and can often be the victims of exorbitant fees for small infractions. Don’t lose money on easy-to-avoid fees by leaving your banking to auto-pay, and don’t lose track of your APR after your sign-up rate expires.
You should also know the optimal window for a balance transfer. While transfers to lower-rate cards can be great for consolidating debt, it’s important to figure in how the transfer fee will affect the savings you hope to make on interest payments, and whether your credit limit is high enough to accommodate the transfer.
Finally, let your credit card work for you when it comes to record keeping. If possible, organize different types of expenses by card and use these designations to optimize rewards, separate personal and business expenses, and simplify your record keeping for tax deductions.
4. Communicate with All Cardholders
If you’re sharing the risks and rewards of launching a small business with a partner or group, communication is key when it comes to managing credit cards.
No matter how the risk is shared, it’s always a good idea to have a formal plan in place detailing how the card will be used and paid off, as well as who will ultimately be responsible for any debt incurred.
From a day-to-day perspective, it’s also important to designate a cardholder for each line of credit (if several employees have cards for business expenses), so that there are no ugly surprises at the end of the month.
5. Make Regular Payments
Racking up debt is easy with credit cards, and it’s even easier to let it grow fat with interest and annual fees while you’re busy getting your business off the ground.
The thing to remember is that while credit cards will offer you the cash cushion you need to operate in your startup’s early stages, neglecting or mismanaging that debt can also stunt your company’s future growth by undermining your personal credit and your eligibility for larger business loans.
If possible, make regular payments and manage your credit card debt like you would an SBA or bank loan. Keeping your balance manageable and below 30 percent of your credit limit can also help boost your business credit and make you a more desirable candidate for other forms of financing down the road.
6. Stick to Short-Term Needs
Need to build a prototype? Take a red-eye to promote your product? Or even hire a few interns? With responsible management and optimization of rewards and special offers, the right credit card could be the tool you need to get your business up and running.
Don’t shy away from credit cards because of bad experiences you’ve heard from friends and family. But be sure to investigate all your options and select the financing methods that make the most sense for your budget, business, and mission.
That being said — don’t make relying on a credit card a habit. Financing your small business with credit cards should be a temporary measure to inject growth into your business. Once you’ve built up enough personal and business credit and are able to set up an accurate financial forecast, you should look into applying for business loans instead.