It can be tough finding the start up capital you need to get your business idea off the ground. Lenders often require business history or for you to personally meet certain requirements to be eligible for borrowing. So, when offers from credit card companies land on your doorstep increasing your credit limits and tempting you with introductory offers, borrowing money on a personal credit card can become a real option to move your business idea forward. But, as with every form of finance, there are pros and cons which you should be aware of before you decide to use your personal credit card to start a business, and how it might affect your credit rating.
Pros of Using a Credit Card to Start a Business
Great Deals
Credit cards have some great low rate or even interest free options available for cash advances and purchases for a certain period of time.
Typically, these great credit card deals can beat the interest rates you would pay on traditional business loans, saving you much needed money.
Each deal varies from card to card. Therefore, check the terms of the personal credit card you plan to use. GoCompare is great site to help you compare deals that are out there. Or, it works as a benchmark whether the deal being offered by your credit card company is as good as it professes to be.
Flexible Repayment Terms
Unlike a business loan, which needs to be repaid at a set amount each month, using a credit card means you can make repayments against the amounts you have borrowed as and when you have the business cashflow available. Low rate interest rates being offered by credit card companies are now extending to periods over 2 years. This gives you sufficient time to get your business time off the ground with the flexibility you need when your cashflow is likely to be at its tightest.
Reward Schemes
Many credit cards have reward schemes attached to them. This equates to you being able to earn points as you spend money. If you are planning to borrow an amount of cash to start up your business why not benefit personally from reward points on the side? Here are some great reward schemes available at the moment:
American Express offer Shopping Rewards and Avios Points that you can convert into British Airways flights.
Tesco Credit Card rewards you with Clubcard points to spend on your weekly shop.
Barclaycard promises you experiences such as gigs and other events.
Avoid Credit Checks
If you have a personal credit card already available, you will avoid undertaking credit checks both personally and for your business which are an inevitable part of traditional business borrowing.
Quick & Simple
Borrowing money can be time consuming and involves setting meetings as well as producing lots of formal documentation. By borrowing on a personal credit card, often with a simple phone call or logging in online, you can get the capital you need to quickly.
Cons of Using a Credit Card to Start a Business
As with any form of finance or borrowing, there are risks associated with borrowing money on a credit card. Therefore, we advise you take the time to seriously consider these before you use your personal credit card to start a business:
Personal Liability
You and you alone are personally liable for the debt on the card. Even though you have borrowed the money for business purposes, the debt does not belong to your business. So, in the event that your business does not succeed the amount you borrow will need to be repaid.
Failure to repay your credit card will affect your personal credit score, which determines things like your ability to borrow for things like mortgages.
Repayments
No matter what deal you choose from the credit card company, monthly repayments will need to be made once you borrow the money. Make sure you put a simple cashflow in place to understand how you will make these monthly repayments. This can be either from earnings by your business or personally. Missing any repayments will result in costly late payment fees which are added to the amount you owe.
APRs after the introductory offers
Before you borrow any money from your credit card, set out a cash forecast which dictates how you will repay the full amount you have borrowed, not just the minimum payment. Often the interest rates applied after introductory offers expire can sky rocket! This means that if you are repaying a minimum amount each month, your repayment will begin to just cover the interest being applied. It’s at this point traditional business borrowing will probably have worked out cheaper for you.
How to Share the Risk if You Have a Business Partner
Even if you have a business partner, the borrowing on the credit card is just your personal liability. If your business doesn’t work out, your business partner can simply walk away and leave you to deal with the outstanding loan. Consider the implications of this carefully and whether you need to create a legal agreement between yourselves as to how to split this borrowing.
Borrow too Soon
Taking money on a personal credit card is quick and easy, but don’t rush into taking money too soon. Consider whether you can continuing testing your new idea in a minimum state. This is to avoid borrowing money too soon, particularly, if you have not done sufficient market research to check you idea is viable.
Borrowing on a credit card is a simple and quick way to access the money you need to start up a business. If managed correctly, it can be a cheap way form of finance. If you do choose to use your credit card to start a business, then setting out a realistic plan for you and your business which details how you intend to repay the full amount of your borrowing, not just the minimum repayments, is the key to managing this form of financing correctly.