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The Pros and Cons of Financing a Startup With Credit Cards

Erica Sandberg
Erica Sandberg
Business News Daily Contributing Writer
Updated Aug 03, 2022

When starting a business, you might consider financing your startup with a credit card. What are the advantages and drawbacks?


  • When used correctly, credit cards can be useful financing tools for your small business.
  • Pros of credit card borrowing include maintaining control over equity, accessing inexpensive capital and avoiding collateral. 
  • Cons of borrowing include potential for merged expenses, credit damage, liability issues, insufficient funding and qualification challenges. 
  • This article is for entrepreneurs who are considering using credit cards to cover some of their startup costs. 

Considering using a credit card to finance your startup? For some entrepreneurs, it’s the only way to get your new business off the ground. A 2020 survey by market research firm Clutch found that 13% of the respondents relied on plastic for startup capital.

According to Odysseas Papadimitriou, former senior director at Capital One, financing a new venture with credit cards can be great, but risky. Papadimitriou, now CEO and founder of credit card comparison marketplace WalletHub, gave us the lowdown on charging business expenses to a credit card.

Pros of using credit cards as startup capital 

While it may sound like a risk to borrow funds to finance your new business endeavor, there are some good reasons to do so. 

“The pros of using a credit card to finance a startup extend well beyond convenience, though that is certainly an important factor,” Papadimitriou said. Whether you use the card you have or apply for a new account, the benefits are compelling. 

Maximum equity

In general, people willing to take the risks associated with launching a startup believe they have lucrative ideas on their hands. Maintaining control, therefore, can be attractive. 

The further you can take your business idea without outside financing help, the more of your company’s equity you can keep for yourself and the less oversight you’ll have to deal with. So when you use a credit card, your company’s interest stays with you.  

Low- or no-interest deals

The ubiquity of low interest rates has made it common practice for banks to offer appealing packages to creditworthy individuals and business owners. Many credit card issuers offer 0% interest rates for a limited time. Some are for new purchases while others are for balance transfers. 

Escaping financing fees for a year or more on upcoming or past purchases can help your company’s bottom line. Just one compelling example is the Slate Edge by Chase, which offers 0% APR on purchases and balance transfers for 18 months. There is also no balance-transfer fee, which is typically 3% of the amount you shift over.

No collateral requirement

Request a business loan or line of credit from a bank and be prepared to offer collateral – such as inventory or property, since many of these products are secured. However, most credit cards are unsecured, so you won’t need to scrape up funds to enjoy access to the credit line. [Related: What Is an Unsecured Business Loan?

Cons of using credit cards to jump-start your enterprise

Of course, there’s also a host of potential problems associated with financing a startup by credit card. You need to know what they are before applying for and using a card to get your business off the ground. 

Intertwined business and personal expenses 

When you use a credit card to fund a business venture, the distinction between your business and personal finances can blur. You will need to keep all of those changes totally separate, which requires dedication. If they do become mixed your accounting will be off, which will make tax time more complicated because you’ll have to sift through line items to identify deductible expenses

Potential credit score damage

No matter how confident you are that your company will be a success, nearly all startups are inherently risky. When you use a credit card as a source of funding, you are gambling with your personal credit score. Everything you do with the account will be recorded on your credit reports, and if you charge too much or miss payments your score will decline. That will put you in a tough spot when you want to apply for other credit products. 

Personal risk for a lawsuit

If your company doesn’t succeed, the debt you incurred with the credit card will be your financial and legal responsibility. Collectors may attempt to recoup what is owed not only from your company’s assets, but also your personal income and assets. If you don’t satisfy the liability, you can be sued for the unpaid balance.  

No guarantee for lender

To qualify for a business credit card, the issuer will assess not only your ability to pay, but your personal credit standing. If you’ve had problems with credit in the past, your credit report and credit scores may already be damaged. If that’s the case, you may not qualify for the best cards to help you launch or grow your business.

Low limits

Because credit cards are typically unsecured, the issuer takes considerable risk in granting a large credit line. For this reason, spending limits may be lower than they are for secured loans and lines of credit. Credit cards usually tap out at the $50,000 mark. If you need to borrow a substantial sum, a credit card alone can leave you short on essential funds. 

Ease of overextension

Spending more than you can afford to pay back in a short time period is remarkably easy with a credit card. If you do, you will end up in debt that can follow you for years. Because many credit cards have high interest compounds and rates, the financing fees will make the balance very expensive. And if you do want to apply for different financing options, that debt can make you ineligible, particularly for loans with preferable terms. 

How to finance a startup with a credit card

If you still want to finance your business with a credit card, here are some tips to do it the right way. 

1. Create a charging plan.

Before you make even a single charge, decide what the credit card is for. You may want to use it exclusively for certain expenses, such as shipping or marketing. Whatever you do, never put everything on the card and hope for the best. If you open a 0% APR card, you have more flexibility with charging and rolling over balances, but make sure you satisfy the debt before the regular rate kicks in. 

2. Commit to short-term debt.

Make a habit of paying off the entire balance by the due date. By doing so, you will be guaranteed a 30-day interest-free loan. There may be times when you do want to pay over time, but don’t extend it much longer than three or four months. Calculate how long it will take to delete a credit card debt in a few installments, and then commit to that payment schedule until you’re back to a zero balance. 

3. Maximize rewards.

A reward-heavy credit card can be a business owner’s best friend. If you get a new card that comes with an introductory bonus, you’re off to a lucrative start. Charge an expensive purchase and the issuer will give you a substantial amount of points or cash back.

For example, Bank of America’s Business Advantage Unlimited Cash Rewards Mastercard offers a $300 online statement credit after charging $3,000 within the first 90 days of opening the account. Whichever rewards card you obtain, use it according to your charging plan to keep the rewards coming. By paying the balance before interest is applied, you will benefit from the process. 

Alternatives to financing a startup with credit cards

Although credit cards can be an excellent addition to your business wallet, there are other options to explore. 

Personal capital 

Don’t look past your personal financial capabilities. If you have money set aside in savings or in an investment account, consider tapping into it. You may also use the equity in your home with a home equity line of credit (HELOC) or sell valuable items and use the proceeds to cover some costs. In fact, the more of your own cash you invest in your business, the more carefully you are likely to spend it. 

Business loan 

A business loan that you take out from a bank, credit union or online lender is perfect for major expenditures that you want to repay over time – such as renovations and costly equipment. The interest rates are typically lower than they are for credit cards, and the fixed monthly payments take the guesswork out of what you need to send every month. Check out what is currently available with our overview of the best business loans for 2022

Friends and family

People who love and trust you may be willing to lend you money for your company. You will have to be very cautious with this type of loan, however. If it doesn’t work out and you can’t pay the person back, a valued relationship is on the line. Each party needs to be on the same page: Write all of the terms down, including what you will use the money for, and how and when you will repay it. Both parties should sign the document and file a copy. 

Outside investors

Another funding option is finding wealthy individuals to be angel investors in your startup, or a venture capital firm that’s interested in backing your idea in exchange for a stake in your company. 

Crowdfunding platforms – like Kickstarter and Indiegogo – are another way to generate spending money. In exchange, you may have to send the supporters products, equity or interest on the loan. 

Finding the right funding for your small business

No matter where you get the funds to launch your business, there will be pros and cons. With any method, simply throwing money at a startup does not guarantee success.  

“Efficient use of this money, as well as a lot of hard work and a little bit of luck, are also essential,” Papadimitriou said. A conservative borrowing approach is almost always your best bet. 

Business News Daily staff contributed to the writing and reporting in this article. Source interviews were conducted for a previous version of this article.

 

Image Credit: LightField Studios / Shutterstock
Erica Sandberg
Erica Sandberg
Business News Daily Contributing Writer
Erica Sandberg is a personal finance writer, reporter, and author of Expecting Money: The Essential Financial Plan for New and Growing Families. Her work appears in many outlets, including U.S. News & World Report, Bankrate, CreditCards.com, CardRates, and Experian. Erica has been a spokesperson for J.P Morgan Chase, Western Union, the Better Business Bureau, and Learning Resources, as well as a credit expert in court hearings. She has spoken at national personal finance and journalism events. She hosted her KRON-4 television program, Making it in San Francisco, as well as her financial podcast, Adventures in Money. Her syndicated credit card advice column ran for over seven years. Erica is a small business advocate, and currently writes two columns centered on entrepreneurs: Business Banter and Small Business Credit Profile.