One option that is open to you, as a business owner, is that of financing the enterprise with credit cards. This is where, for instance, you can pay rent for the business premises using your credit card. This is also where you can pay for inventory using your credit card. We are also looking at a situation where you can decide to use funds from your credit card to pay salaries for your staff. In this article, we will be exploring the subject of financing a business with credit cards further: as we try to understand what the pros and cons are, whether it is advisable, what other alternatives are available… and so on.
Pros of Financing a business with credit cards
The key advantage associated with financing a business using credit cards is in the fact that the funds are instantly available. Thus, financing a business with credit cards is unlike applying for a conventional loan: in that, when applying for a conventional loan, you have to wait for quite a time, before the money becomes available. It is important to appreciate that in the life of a business, there are times when money is needed urgently. At such times, you can’t afford to go applying for conventional business loans, or looking for other sources of business finance which tend to take quite a bit of time. At such times, when you need money instantly, the idea of using your credit cards become attractive.
Another advantage associated with financing a business using credit cards is in the fact that the funding is certain, and more or less unconditional. It is just a question of going to an ATM, withdrawing funds from the credit card, and using the funds to pay a business landlord, a worker or a supplier. Other potential sources of funds are uncertain and conditional: as in, you may get the funds or fail to do so. For instance, after applying for a business loan, you have to deal with the reality that your application may be successful, or it may be unsuccessful. Similarly, while inviting other people to inject funds into the business (in exchange for equity), you have to deal with the reality that the invitation may be accepted or declined. You may have a brilliant business opportunity that you wish to take advantage of, but other people (lenders, venture capital fund managers and so on) won’t necessarily see it that way. This is what could push you to consider financing a business with credit cards. With a credit card, as long as you have the card, and as long as you haven’t reached your credit limit, you can be sure that the funds will be available.
Cons of Financing a business with credit cards
The key disadvantage associated with financing a business using a credit card is in the fact that the interest rates to be paid are usually very high. Thus, the question that arises is the one as to whether the returns from the business you are doing will be high enough to pay back the principal, cover the (hefty) interest and still leave you with some profit. Experience has shown that very few businesses are that profitable.
The fact that the funding from credit cards is largely unconditional is another disadvantage. With other sources of business finance, your business idea is interrogated, to see whether it is sensible, before the funds are availed to you. The people examining the business idea are likely to see things that you, in your entrepreneurial fervor, are blind to. But with the unconditional money that is available through credit cards, it is easy to end up spending your money on a venture that is destined to fail, with no one to tell you.
The fact that the interest rates for credit card debt are so high, and the funds are availed to you more or less unconditionally means that, ultimately, the idea of financing a business with credit cards is very risky. This is another key disadvantage. If you opt to finance a business with credit cards, and business fails, you may end up being declared bankrupt, messing your credit score completely… among other things.
On whether it is wise to finance a business with credit cards
The conventional wisdom says (categorically) that it is unwise to finance a business with credit cards. This is something you need to reflect on deeply. We have already looked at the advantages of financing a business with credit cards. We have also looked at the disadvantages of financing a business with credit cards. So it is up to you to weigh the evidence, looking at your own unique circumstances, to see whether the advantages outweigh the disadvantages, or vice versa. We can, however, assert that in most cases, the disadvantages tend to outweigh the advantages.
Ultimately, the idea of financing a business with credit cards should be a consideration of the very last resort. And if you have to finance a business with credit cards, it should ideally be a short-term thing, as you try to find other more sustainable sources of business finance.
Alternatives to financing a business with credit cards
There are many other alternatives to financing a business with credit cards.
One of those alternatives is that of taking a conventional business loan, to finance the enterprise. This is likely to be a better idea in most cases: because the interest rates charged for conventional business loans tend to be way lower than those charged for credit card debt.
Another alternative is that of bootstrapping. This is a question of financing the business with your own funds (for instance, your own savings). Sometimes, it turns out to be a wiser idea to save money over time, and use the money to finance a business: rather than financing the business with credit cards. Saving money will, of course, take time. Using a credit card to finance a business, on the other hand, means that the funds are available instantly. Still, when you consider the risks associated with the idea of financing a business with credit cards, you sometimes come to the conclusion that it is simply better to bootstrap with your own funds.
There is also the option of inviting other people to finance the business in exchange for equity. This too is, in most cases, a better idea than financing a business with credit cards. Granted, it does often mean ceding business control to these other investors, but it is often less risky than using credit card debt to finance a business.