Thinking of using your credit card to finance your startup? For some entrepreneurs, it's the only way to get their new business off the ground. Still, it comes with plenty of risk.
Odysseas Papadimitriou, a former senior director at Capital One, said there are plenty of pros and cons to using credit cards to finance your business. Papadimitriou, now the founder of Card Hub, a leading credit card comparison marketplace, gave us the lowdown.
The pros of credit card funding
"The pros of using a credit card to finance a startup extend well beyond convenience, though that is certainly an important factor," he said. Some of the other biggest advantages provided by this approach are:
- The ability to retain maximum equity: People willing to take the risks associated with launching a startup generally believe that they have a potentially very lucrative idea on their hands. The farther you can take your company without outside help, the more of your company you can keep for yourself and the less oversight you’ll have to deal with.
- 0 percent offers: The ubiquity of low interest rates has made it common practice for banks to offer extremely attractive packages. The ability to escape interest for over a year on either upcoming purchases or funding expenses already incurred would certainly help your company’s bottom line. The best offer currently available is the No Balance Transfer Fee Slate Card from Chase, which offers 0 percent on purchases and balance transfers for 15 months and does not charge a balance transfer fee (most cards charge 3 percent).
- Lack of collateral: If you go to a bank and ask for a business loan or a business line of credit, they will want collateral. If you want to bring on investors, they’ll want equity. Credit cards, on the other hand, are unsecured.
The cons of credit card funding
- No separation between business and personal: When you use a credit card to fund a business venture, the distinction between your business and personal finances largely disappears. This is important for three reasons:
- It presents the possibility for personal credit score damage: Startups are inherently risky, and when you use a credit card to fund one, you are gambling with your personal credit score.
- You are personally at risk for a lawsuit: If credit card debt proves to be the downfall of your company, debt collectors will likely be able to come after both your company and your personal income/assets to recoup what you owe.
- Credit cards might be unattainable:The fact that business credit card underwriting has more to do with your personal credit standing than that of your business might help you get a better credit card, but it could also have the opposite effect. Past personal credit problems could keep you from getting a credit card that will truly help you grow your business.
- Potentially low limits: Because credit cards are unsecured, they generally provide lower spending limits than secured alternatives. Sure, you could get up to tens of thousands of dollars to play with, but there is usually an invisible ceiling around the $50,000 mark.
- Overextension: The potential to spend more than you can afford to pay back is not a negative unique to credit cards. Misuse of any small business funding vehicle can put you in the hole, which is why you should handle them with extreme care.
Ultimately, regardless of the funding method you decide upon, simply throwing money at a startup does not guarantee eventual success, Papadimitriou said. "Efficient use of this money as well as a lot of hard work and a little bit of luck are also essential," he said.
Odysseas Papadimitriou is a former senior director at Capital One who left that post to become an entrepreneur in 2008. He is the founder of Card Hub, a leading credit card comparison marketplace.