Finance Your Business Using Credit Cards

Funding for small and home based businesses usually come from family & friends loans or personal credit cards, according to a study by the Pioneer Institute.

For entrepreneurs that need to find funding for their business, borrowing against a credit card can be an appealing option. While credit cards are widely used, many entrepreneurs are unaware of the financial implications for these common financial instruments. As an entrepreneur, if you believe that using a credit card to fund your business is the best option for you, be sure to understand the terms of use of the credit card. Understanding the risks before you accept the credit card can save you a lot of financial pain in the future.

1. Personal Guarantee

Many entrepreneurs are reluctant to sign a personal guarantee for a business credit card because in reality, it is just a line of credit, and you are the de facto guarantor of the business debt. So if your business isn’t meeting its business plan and you fall behind on your credit card payments, your personal credit rating is at risk. You don’t even need to be the majority owner of a business to be on the hook for its debts. Banks and credit card issuers require that all business owners are responsible for the entire amount of the debt, even if they're not full owners of the business.

2. Consequences of Credit Card Risk

What actually happens in the event of a business closure or default on debt secured personally by an entrepreneur? First, business assets will be liquidated to cover all debts in the order of priority. Each type of debt has a lien position, meaning in what order the debts have to be repaid. Once the business assets are dissolved, the assets of the entrepreneur or personal guarantor are liable to cover the debts. If the entrepreneur does not have enough personal assets to satisfy the business debts, they will be forced to consider alternative measures such as bankruptcy.

Read about how one entrepreneur financed his business with credit cards and barely survived to write about it.

3. Credit Card Interest Rates

In addition to credit cards posing challenges in regard to personal guarantees, they can also be very costly. Interest rates on credit cards are often substantially higher than other business loan types. When interest rates are high, entrepreneurs pay more than they realize for products and services required to run their business unless the balance is paid in full each month. These increases in costs ultimately drive down the business’s profit margins.

So, before you use credit cards to finance your business’s start up cash needs or to fund short term cash flow requirements, consider the implications of both personally guaranteeing a credit card loan as well as the true cost of its annual interest rates.

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