Beginning a startup can prove to be a very rewarding endeavor, as it can serve as an extra stream of income. You may also be able to address a prominent want or need in society. However, in order for any startup to be successful, the money will be needed to fund business operations. Finding out where to get this capital can be challenging.
Some people consider putting all of their expenses on credit cards, and while immediate access to funds and rewards can be tempting, it can also be a very bad idea for a variety of reasons. Using a credit card as a medium to fund startups come with a lot of risks, and can end up hurting you even more financially than when you just started. Here are specific reasons as to why you should avoid using a credit card to fund your business.
It Is Expensive
Financing long-term debt with a credit card is very expensive and is better served for smaller purchases that can be paid off quickly. A good rule of thumb is to use a credit card for purchases that can be repaid in no more than two months. The annual interest rate on average for credit cards is approximately 25%. This means that it is becoming increasingly expensive to keep a balance monthly.
If you get a balance on a credit card that starts to approach six figures, debt will accumulate rapidly just off the interest alone, and unless your startup is a rapid success, you will be spending a great deal of time paying off that balance back. If you are interested in services that provide low-interest rates with single monthly payments, Alamo Associates is a good resource for credit card problems.
You will also have to account for the potential personal risk that comes with using credit cards for business purposes. Founders of LLCs (limited liability companies) are usually protected from company debt. If a firm were to default on a loan, the founder would still be protected.
However, if a personal credit card or a loan is used to fund startup operations, this means that the individual will be accepting personal responsibility for the financial success of the business. If the debt is unable to be repaid, you will see your credit score dip dramatically. What makes this worse is that this will hamper your ability to get future loans and other forms of financing. This will harm your ability to make purchases such as homes or cars.
Leads To Sloppy Financial Habits
Another thing to consider is what using a personal credit card to finance business operations can do to your personal spending habits. A personal credit card is used as a medium for business funding typically leads to a problem in cash flow.
This is unlike a business loan, where a certain amount every month has to be set aside to pay it off. You also don’t have the option of making minimum payments when the cash becomes tight and harder to come by. This means that you also have to always have access to adequate cash reserves at all times.
Personally, if you are one that typically is only able to make the minimum payment on credit cards monthly, or if you make purchases beyond your means to pay back, this can directly intertwine with business spending. It is one thing for your business to suffer financial collapse (many businesses do not get off the ground). However, what you should be prioritizing is your personal financial health, and the potential drawbacks that using a credit card for business expenses can have on your own personal habits.
If you are currently experiencing issues with credit card balances, you could consult Alamo Associates for an alternative that offers low-interest payments and single monthly payments.
As you can see, funding your startup with credit cards is a risky endeavor, and it comes with plenty of risks. It is generally not a good idea to fund business expenses with your personal credit card. In the end, the potential benefits of immediate access to capital do not outweigh the potential risks of damage to your credit score and harming your chances of getting access to necessary future financing. If you are serious about a startup, there are more effective ways that you can fund a startup without having to resort to your credit card.
There is reward-based crowdfunding, for example. Businesses will be able to raise funds from a group of individuals with the promise of an early version of a product or service, depending on how much is being donated. these fees typically include platform fees, a per donation fee, and payment processing fees. These fees are significantly less than credit card interest rates. If you are a startup that is focusing on consumer-focused products to raise money, this is an option you should consider.
Personal loans are typically not used as the first option, but if all else fails, this will be a decent backup option. However, you will have to prove that you are financially responsible in the form of a good credit score. But remember, personal loans should really only be used as a last resort because individuals will be personally responsible for repaying the debt, and defaulting will do severe damage to your credit score.
Finding funding for your business can be a challenging task, but credit cards should not be the first option that you think of. Consider other options due to the heavy risk associated with it