When you decide to start a business, the first thing you need is the startup money. Some entrepreneurs have been saving for this particular moment all their life and bootstrap their businesses. Others might turn to banks and apply for small business loans. Others, however, choose to use and rack up credit cards to launch. And while using personal credit might be the logical solution, it doesn’t always work out well. Funding a startup with a company card is a legitimate way to get things off the ground, but only if it’s used properly. If you’re considering applying for a business credit card, here’s what you need to know.
Prioritize Your Education
You may already have a killer niche in mind but rushing things can lead to a disaster. Your best bet is to focus on getting your business degree, so you’re well-prepared ahead of time. And since college is an investment within itself, you want to have an easy time paying for it. You can secure the funds you need by taking out a student loan. If you’re already finishing up your degree, but feel like you need more information, you can always postpone opening your startup and pursue completion of your higher education first. Either way, a private lender offers reduced rates, which makes your education easier.
You Need Startup Funding
Regardless of your niche, every new startup needs to choose the right tools for starting a small business and the money to launch. You may already have enough credit to get what you want set up. However, unless you have a high limit already, you may max out your cards before opening day even begins. Since there are plenty of pros and cons associated with using credit to fund a new startup, it’s important to consider all the possible what-ifs.
Pros And Cons
There is a portion of new business owners use their own credit to open their businesses. However, there are a variety of other finance options to consider. If your company is expected to have a high return on investment, you could pitch your idea to an angel investor or venture capitalist. Since you’re just starting out, you may not have enough collateral to be approved for a commercial line of credit or bank loan. As tempting as it is to use your own credit, you do need to weigh the pros and cons before you start reducing your available credit. Let’s break these down a bit further:
- Pro: You Won’t Lose Equity: Using credit absolves you from losing any equity and is just one of many forms of debt financing. Debt refinancing means you’re not using giving ownership of a share of the business, which means all the equity remains yours.
- Con: Your Debt Limit Might Not Be High Enough: As you’re probably aware, credit is not an infinite resource. You can only take out so much before you reach your limit, which makes this a possible downside of using your own credit. If you don’t have an exceedingly high limit, it’s easy to overspend. You might not have enough credit to fund your startup either. If you max out your cards, it can lower your credit score and prevent you from getting a business loan.
- Pro: The Interest Rates Are Lower and You Might be Privy to Reward Programs: On a positive note, your interest rates may be lower, there’s typically no balance transfer fees, and you have a revolving line of credit. You’re also in control of your cash flow, which helps you not overspend. If your cards offer rewards, using it can increase your cash back amount.
- Con: You Might Not be Eligible for Other Financing Options: Using a credit card to finance your startup can help you cover the necessary expenses. However, it can also accrue too much debt at once. If a business has too much debt, it can potentially keep you from being able to procure other forms of financing.
Look to Other Financing Options
While you’re more than welcome to use credit, there are other ways to finance a business. Business loans are always a viable option as they’re relatively simple to obtain. They’re mainly for ensuring a startup has what it needs. Just remember to be transparent with the lender about what you plan on using it for. The second option at your disposal is crowdfunding. Crowdfunding is a type of fundraiser where people donate money to a specific cause. You post everything there is to know about the excursion to give those who donate a sense of security. Being transparent also helps build trust between both parties. Who you really want to look out for is an angel investor. An angel investor is someone who invests a larger-than-average amount of money. The average amount they donate is at least $10,000.