Creative Business Financing Options: Credit Cards

Credit cards can be a great way to creatively finance your startup business. Shop for a good interest rate, understand fees, manage your credit score and you could be on your way to entrepreneurial success.

The history of startup businesses includes many business legends that got started by leveraging credit cards as a creative business financing tool. Sergey Brin and Larry Page used plastic to start Google in the mid-Nineties. They ran their credit cards to the max, and mindful of their limits they chose to buy used computers and employ open-source software – meaning that their capital restrictions actually contributed to today’s global dominance by Google of the search engine business!

On the other hand, there’s Monroe Mann. In 1999, he started a company in New York City to teach business skills to artists and other freelancers, calling it the Unstoppable Artists Business School . But he relied almost solely on credit card debt to finance some big up-front expenses such as advertising in a local theater newspaper, running his tab up to $65,000. And in 2003, just before deploying to Iraq as part of his National Guard unit, Mann had to file for bankruptcy. He’s renewed his business since his return from the war, but Monroe doesn’t finance anything with credit cards anymore!

Credit card debt is a slippery slope,” says Jay Trien, a certified public accountant in Morristown , N.J. “It’s easy, but it’s also dangerous. It doesn’t mean you shouldn’t use credit cards for bootstrapping your business. It just means you need to keep on top of it.”

How to handle credit cards as a means of creative business financing:

Consider the plusses and minuses: Credit cards can be an especially effective way to finance a startup business if you’re keeping your day job while you start your company, because your employment income can help you keep current with your credit card obligations. They are an easily available form of capital that most people already have at their disposal. And as long as you toe the line and make big enough payments on your balances on time, credit card companies are more than happy to raise your credit limit repeatedly.

But beware — paying interest rates that can amount to 20% or more at an annual clip can be a killer. “You might be a lot better off,” says Trien, “using a home-equity mortgage to get your funding and pay interest only, or pay it off over 30 years. Everyone gets excited about a new business and making money and having a better life. But you also have to ask the question, ‘What am I going to do if this thing doesn’t work out and I’ve picked up $10,000 or even $100,000 of credit card debt?’ Especially with the new bankruptcy laws, you’re not just going to walk away from it anymore. It’s much tougher to escape creditors.”

Our best advice to avoid getting behind the eight ball with creditors is this: create a payment plan in advance so that you know where your credit card payments will come from each month, and how much debt you can realistically afford. Plan to pay more than the minimum payment each month. Remember that this is personal debt, and if the business fails, you’ll be left holding the bag.

Put your finances in order first: Maintaining a good overall credit rating should be a staple of your personal finances, of course. But it’s even more crucial to keep your nose clean as you start your business. So make sure you handle your plastic as carefully as possible, diligently making at least your minimum payments, and making them on time.

Having a stellar credit rating to begin with may help you get a break from credit card companies as you ramp up your business expenses. “Some will offer you a special one-time [interest] rate of just a few percentage points, if you want to write a check for the whole amount of your line of credit and get a big cash advance,” says Larry Rice, an accountant and business development expert with the firm of Rodman and Rodman, based in Newton , Mass. In some cases, having a stellar credit rating can even get you a 0% interest rate for anywhere from 3 to 18 months, which could give you just the amount of time you need to get that startup business up and running.

Understand how your use of credit cards affects your credit score: The last thing you want to do is hurt your credit score at the critical moment when you are finally starting your business. It will impact many things in your life, including your ability to buy a car or home, get a good auto insurance rate, or get business credit and loans down the road. And did you know that making a late payment on one credit card might be reason enough for another credit card to raise your interest rate? Educate yourself about what making late payments, applying for multiple cards and maxing out your cards might do to your credit score. And read the fine print on your credit card agreements. For general information on how your credit score is calculated, and where you can get a free copy of your credit report, visit the Federal Trade Commission.

Do some comparison shopping: Check out the latest credit card rates available at a site like, check your bank or credit union for their rates, and open all those credit card offers you get in the mail. Don’t just settle for the card you already have in your wallet with the 20% interest rate – see if you qualify for something better.

Be sure to educate yourself upfront about the fees and penalties associated with your existing credit cards, or cards for which you’re considering applying. Learn about your card’s annual fee, as well as fees for late payments, going over your credit limit, cash advances and balance transfers. To get general information about how to shop smart for a credit card, visit the Federal Reserve.

Beware the possibility of limit reductions: One of the ironies of using plastic to bootstrap a small business is that, just at the point where you may most need your credit cards, you may be placing yourself in the biggest danger of having them become less valuable to you. That’s because, if you finally quit your job to devote full time to your growing business, credit card companies may start to get nervous about your ability to pay off your balances. One solution: continually draw as much as possible in cash advances from your credit cards, making it impossible for the plastic company to curtail your limit.

Our Bottom Line:

Credit cards can be an ample, and convenient, way to creatively finance your startup business. If you take the time to shop for a good interest rate, understand and avoid fees, carefully manage your credit score and create a solid payment plan, you could be well on your way to entrepreneurial success. But just be very careful about the huge potential pitfalls, and plan a head to stay on top of the credit-card debt you do incur starting your business.

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