One of the biggest hurdles to starting a business is generating enough capital to make the initial investment. Even if you have a fantastic idea, with a clear path to revenue and growth, if you don’t have the cash to get that momentum started, you might never bring your business to life. So the real questions we have had several readers ask: can you start a business using credit cards?
There are many conventional roads to funding your business, but almost all of them come with significant drawbacks:
- Taking out a business loan (or a personal loan to start a business) is one of the most common methods, due to its availability and relative simplicity. However, being on the hook for a high interest rate can be unsettling, and not everyone has the potential to be approved by a major lender.
- Angel investing. Angel investing relies on finding a wealthy investor who’s willing to own a stake in your company. One investor is usually enough to give you enough money to start things up, but you’ll also forfeit a stake in your company—and possibly, some of your decision making power.
- Venture capital. Venture capitalists work similarly; you could get a massive cash injection, but only by forfeiting some of your control. Plus, you’ll need to go through the motions of pitching your business and hoping to be one of the final candidates for selection.
- Crowdfunding is another option, and one that doesn’t require forfeiture of your autonomy; however, crowdfunding is far from a guarantee of success, and you’ll still need some way to partially compensate your backers.
So what if you could take on all the business costs yourself, using credit cards to cover the difference between your own savings and the actual expenses of getting started?
The Costs of Starting a Business
Let’s start by examining the costs of starting a business. The average cost of a startup is $30,000, but that figure varies wildly, based on many of the following startup costs:
- You’ll need somewhere to set up shop, whether it’s a formal retail location or an office building for your workers. Count on several hundred to several thousand dollars of rent (unless you start a business from home).
- Ranging from a personal laptop to an entire factory’s worth of equipment, startup costs here vary tremendously.
- Licensing and fees. Licensing and fees usually only cost a few hundred dollars, but may cost more for certain industries.
- Working alone is inexpensive, but if you have anyone on the payroll, you’ll need to consider their costs.
- Marketing and advertising. Though some of the best marketing is free, you should still have a dedicated budget for marketing and advertising. Start with a few hundred dollars a month to build initial interest.
- Insurance is one of your most important business investments, but not all businesses require the same level of coverage.
- Starting inventory. If you’re selling physical items, you should have some inventory to start. Establishing those introductory lines could cost several hundred to several thousand dollars.
- Don’t forget the first few months of utility costs, including water, electricity, and even internet.
- It’s almost impossible to start a business without at least a few hours of consulting from lawyers and other experienced business professionals. Count on a few hundred to a few thousand extra dollars here.
Hypothetically, you should be able to reduce these collective costs enough to fit squarely within your credit card limits, assuming at least a few thousand dollars per credit card, and a few credit cards.
Types of Credit Cards Available
We also need to consider the types of credit cards available.
There are different credit cards that are based on a few factors:
- Your credit score.
- Whether you’re taking them out in your own name or in the name of a business.
- The type of rewards they offer.
- Their inherent features.
Your choice of credit card could make a major difference in terms of your upper limit, what kinds of things you can buy, and what terms you’ll be responsible for. Before moving forward, you should do a thorough review of today’s best credit cards, and decide which ones are best for your business.
The Advantages of Starting a Business Using Credit Cards
So what are the advantages of following a credit card-based startup model?
- Speed and simplicity. One of the biggest advantages of credit cards is how fast they work, from start to finish. If your credit score’s in relatively good shape, you can get approved for a credit card in the span of a few days to a few weeks. You’ll have at least a few thousand dollars of spending power that you can use to start building your business. Transactions generally don’t have to go through an approval process. You’ll get what you need almost immediately. You can pay them off without having to consult the terms and conditions of your arrangement first.
- Credit cards are also extremely flexible, capable of being used for almost any purchase you can imagine. All of your purchases are kept on a single record, so you can keep your business’s finances organized, and if you ever need to change things up (by switching to a card with a lower interest rate, or one with a higher limit), you can. There are dozens of different credit card providers, and virtually unlimited credit card options; accordingly, it shouldn’t take you long to find the perfect fit for your business.
- Speaking of perfect fits, credit cards are highly attainable. The process of finding an angel investor or venture capitalist who happens to be interested in your project can be long and complex. Even getting a business loan has significant hurdles that not everyone can overcome. With credit cards, even people with low credit scores can get approved with relative consistency, assuming you’re willing to make a few sacrifices (such as a higher interest rate).
- Credit cards give you greater autonomy as well. Few credit cards have specific limits on what you can buy; instead, they have overall limits to the dollar amount you can buy. When using a credit card, you also don’t have to confer any ownership or decision making power to other people. This means you stay in greater control of your business at all times. As long as you’re confident in your own decision-making skills, this is a better decision—and if you ever want outside help, you can always consult a mentor.
The Disadvantages of Starting a Business Using Credit Cards
Of course, there are some disadvantages to consider as well:
- Personal liability. You typically can’t get a business credit card if your business isn’t established. It might be easier to use personal credit cards, or tap your personal credit to get a business line of credit. That means if your business doesn’t succeed, or if you aren’t generating enough revenue, you could be held personally liable for everything you bought. If you don’t have an emergency fund, that could be personally devastating.
- Interest rates. Credit cards also typically come with much higher interest rates than a typical business loan or other forms of fundraising. Though rates vary, and you can negotiate for lower rates, you can expect to pay the average rate of 15 percent—which is substantial, especially if you plan on paying for thousands of dollars of equipment without paying it off for a series of months (or years).
- Your credit score. Taking on new credit cards can damage your credit score. Especially if you don’t have much history or other factors to offset it. This can make managing your personal finances even more difficult (and you’ll be facing enough challenges as a new entrepreneur). If you aren’t able to pay your credit cards off completely, or if you fall too far behind on your payments, your credit score could take an even bigger hit. This makes it harder for you to get credit cards again, and possibly interfering with your entire financial future.
- Long-term viability. Credit cards also don’t have much wiggle room for long-term growth. You can’t keep taking on more and more credit cards when you need to purchase more items. Nor take on more when the demands of your business start expanding beyond the basics. You’ll need some other financial system in place to accommodate that growth. Your interest payments will soon eat up too large a share of your revenue. For that reason, it’s usually better to have a more long-term viable solution in place from the beginning. This is unless you plan on using credit cards only as a temporary measure.
Is It Possible?
So is it possible to start a business using only credit cards? The technical answer is yes, and plenty of entrepreneurs have done it or attempted to do it.
Does that mean that starting a business by racking up credit card debt is the right choice for you? The answer is almost certainly no. Credit cards as a primary mode of funding are best reserved for people who strongly dislike other funding options. Business owners who are willing to take a significant personal risk.
For people with low-cost startups who want to get things done as quickly as possible. For all other entrepreneurs, it’s best to leave credit cards as emergency options to supplement your other modes of funding.