For Many new entrepreneurs, funding a business means borrowing money. It may be only a small amount, or it may require hundreds of thousands of dollars. An increasing tend, especially with smaller home-based businesses is the use of credit cards to fund a startup. While with proper use they can be a great tool, there are many things to watch out for.
Ease of Obtaining Credit Cards
If you think that you receive a lot of personal credit card offers in the mail already, just wait until you finally register your business. You will have credit card offers arriving in your mailbox on a daily basis. It may seem tempting to open up a new business credit card in order to immediately establish some cash flow, but just because it is easy doesn’t mean it is a good idea.
Be Wary of Interest Rates
Just like personal credit card, business cards will lure you in with attractive 0% offers or reward programs. Once the introductory rate has concluded you may find yourself paying 15-25% APR. This high interest can eat away at any profits you may begin to make with your new business.
Business Credit vs. Personal Credit
One of the biggest misconceptions people have is that their business credit card isn’t a part of their personal credit record. In most cases, this is not true. A new business starts out just like a teenager who just turns 18; there is no credit history. Many people believe that just by opening up a business credit card that they will establish credit for the business. This is almost never true.
Those card offers you get in the mail are really business credit cards, but when you read the fine print, you are actually signing a personal guarantee on the account. This means that you are personally responsible for making payments if the business is unable to. The bad news is, even if your business fails, you are personally on the hook for the debt, and if you make late payments, they will go on your credit record. Don’t be fooled into thinking it is a risk-free way of financing your business.
Use Them as a Tool, Not Financing
Credit cards do have their place in business just as they do in personal finance. They are a convenient way to make purchases and potentially receive cash back or other rewards. What you have to realize is that you should treat a business credit card just like you would a personal card. Only charge what you can afford to pay back, keep interest rates low, and make payments on time.
