Launching a company is the dream of many business-minded people. With TV shows like “Shark Tank” showcasing entrepreneurs who are turning their product or service idea into millions of dollars, it is more tempting than ever to chase a similar dream. Taking risks is part of the process when founding a business, but some risks make more sense than others.
Many entrepreneurs turn to credit cards to finance the early stages of their business, but that’s a strategy that should be avoided. Here are some things to be aware of when contemplating using credit cards to launch a company:
High interest rates — This is the obvious downside of using credit cards to finance a start-up. Yes, credit cards are easier to obtain than a small business loan or other sources of credit, but they typically come with significantly higher interest rates. If your credit rating is strong, you should be able to secure a small-business loan. If your credit score is low, you will pay an even higher rate than normal for credit cards. It may be wiser to postpone launching your business until you improve your creditworthiness.
Low limits — Most credit cards come with a low spending limit, which means one card is unlikely to provide you with enough capital to successfully finance your business. This often leads to people taking out more than one credit card, which leads to sinking further in debt.
Lower credit score — If you are issued multiple credit cards and your business is not successful, you risk having your personal credit score sink if you’re unable to make the minimum payments.
Review your options
Before putting the bulk of your business start-up costs on credit cards, review your other options. Applying for a small-business loan from a community bank, seeking a peer-to-peer loan or even crowdfunding may be smarter than starting a business with credit card debt.
A knowledgeable business formation attorney can help you determine the right strategy while also handling the necessary legal work of starting a business.