Can you start your business with a credit card? The answer is yes, and there are reasons why owners should get such cards when starting a business. At the same time — as with all credit products — there are also cautions to consider.
There are both business credit cards and personal credit cards. There are differences between the two. Which is better when starting a business? Let’s compare.
Using business credit cards is sensible
Business credit cards exist to further the purposes of, well, a business. If you own a restaurant and need $500 in groceries, it’s easier to buy with a credit card than to pay cash or write a check. And urgent purchases like perishable food won’t wait for you to apply for a loan.
And you can use the receipts and monthly statements to track expenses. You can see how employees are spending your money. Your accountant loves receipts and statements.
With some business credit cards, you can earn one or more benefits.
- Discounts and points
- Annual fee waivers
- Balance transfer waivers
- Introductory low / no interest periods
- Cash-back bonuses
- Cash back may be more generous for business cards
- In some cases no spending limits
These benefits can offset your business expenses, and every benefit counts.
Use of a business credit card can lead to improved credit scores, especially if you pay off outstanding balances in full and on time each month.
But starting your business with a credit card? There are downsides with business cards.
Starting a business is different
Business credit cards offer some great benefits. But also more risk than consumer accounts.
The 2009 Credit Card Accountability Responsibility and Disclosure Card Act (the CARD Act) offers a lot of consumer protections. Late fees are limited to $25, interest-rate hikes require 45 days’ notice, and so-called “two-cycle” billing is prohibited. This is great stuff but it only applies to consumer accounts. Business credit cards are not covered.
And you can’t use your consumer cards for business spending. You don’t want to co-mingle business and personal spending. Your accountant (and the IRS) don’t like that.
It can make sense to start a business with a credit card if the offer includes zero interest for at least 12 months (18 is better) and you have a plan for paying it off before the higher rate kicks in. It can be convenient and fast.
But in the long run, credit card financing is not cheap if you don’t pay your balance every month. And variable interest rates make budgeting more difficult. Budgeting is a big deal for your household. It’s an even bigger deal for your business.
Lastly, don’t pay your business credit card and you’re probably personally liable. Banks have armies of lawyers to get back what’s theirs — with interest and fees.
There are many business financing alternatives that are cheaper than credit cards and make budgeting easier.
Personal credit cards
Business and personal credit cards are pretty much alike. Both are revolving credit accounts, both charge fees and interest, and in many cases, both provide an assortment of benefits.
The attraction of personal credit cards is that you likely already have them. The probability is that you have unused credit you can use for business purposes. It’s hard to know where business spending and personal spending are different in the gig economy. If you work at home and buy a computer is it a personal expense or business expense? Be sure to ask your accountant.
Personal credit cards have the advantage of CARD Act protections. However, using one credit card for both personal and business expenses is generally not a good idea. It’s better to have one personal card which you elect to use only for business in a second personal card for everyday expenses.
Avoid multiple credit card applications
What’s not good is to apply for a fist-full of credit cards at one time.
“While getting a new card every few years will not have a large impact on your credit,” explains Experian, one of the three big credit reporting agencies, “if you add too many in a short period of time, your scores could suffer. Too many credit card applications in a short period of time will result in multiple hard inquiries.”
Experian adds that “these inquiries are recorded every time you apply for new credit and they remain a part of your credit reports for up to two years. When too many of them occur in a short period of time, they can negatively impact your credit scores. (The only exception is when you are rate shopping for a specific type of loan, such as an auto loan, over a short period of time.)”
How to start your business with a credit card
When starting a new business, it pays to plan ahead. You need a business plan and in that plan you need a budget. Whatever it is that your budget says you are likely to spend, don’t go in without a cushion for the unexpected. It’s good to have the additional cash or credit available — just in case — and credit cards are perfect for that purpose. In effect, they can supplement personal savings and other cash sources.
If your ONLY source of business financing is a credit card, you really need to reconsider your business plan. You have to ask if you have sufficient cash and credit go ahead. Maybe it’s better to wait a little, put more money in savings and raise additional funds.
While credit cards are quick and convenient, you might also want to consider other forms of financing to start your business. If you have real estate equity you may be able to get a second mortgage, a cash-out refinance on your home, or a home equity line of credit (HELOC). Because this type of financing is secured by the value of your home, the interest rate will be far lower than a credit card.
While financing secured by real estate can be very attractive, it also has a downside. If you don’t repay a real estate debt, you can lose your home to foreclosure.
No real estate? Look into personal loans. Personal loans are unsecured financing available through banks, credit unions, and sometimes friends and family. You get money upfront and then repay over several years with a fixed interest rate and regular monthly payments.
If the idea of going into business seems attractive, don’t start with plastic until your ideas are firmed up. And just because credit card issuers don’t require business plans doesn’t mean you should skip this important step.
Get help from free sources in your community such as SCORE and 1 Million Cups. Test your ideas on platforms for entrepreneurs such as Kickstarter.