Using a Credit Card to Start a Business
Financing a new business using credit card debt is often considered when founders have few other options.
In the 2017 Year-end Economic Report, the National Small Business Association (NSBA) reports that financing continues to be a challenge for small firms. Large banks dedicate only 15% of their financing to small businesses. Community banks, SBA loans and credit unions are even lower at 14%, 4% and 2% respectively.
31% of small businesses they surveyed stated that they are using credit cards as one form of financing. Because new small businesses are less likely to qualify for traditional loans, they may turn to the use of personal or business credit cards.
Differences between Credit, Debit, and Charge Cards
American Express charge cards are often used by small businesses. It is important to understand the difference between a charge card and a credit card.
A charge card must be paid off in full every month while credit cards allow businesses to carry a balance. Charge cards may not have a known credit limit; however, issuers do set a soft limit based on what they feel you could repay each month.
Debit cards often resemble credit or charge cards; however, they draw money out of an existing account balance. They do not extend credit or create debt.
Personal and business credit cards also have important differences which we will explore.
Advantages of Using Personal Credit Cards
One obvious advantage of using your personal credit cards to start a business is that you probably already have some. New businesses use personal credit cards to start and fund operations at least until they can qualify for a business credit card.
They may also continue to use personal credit cards because of the better consumer protections unless they wish to strengthen their business credit profile.
Drawbacks to Using Your Personal Credit Card
Keep in mind the risks of potentially maxing out your credit cards, damaging your credit scores (both personal and business), and being unable to cover emergencies.
Think about what other purchases you plan for the future because debt taken on to finance your startup could prevent you from financing a home, car or college education later.
Advantages of Business Credit Cards
There are numerous advantages to financing your business with a business credit card. Business credit cards often provide much higher credit limits because businesses typically have higher spending and also larger incomes than consumers. Having a higher limit can improve your overall business credit score. Building a separate business credit score provides more potential overall credit.
Issuers may also offer additional business credit products and perks such as expense management tools to businesses that use business credit cards. Rewards programs for business credit cards are geared toward the types of spending typically made by a business such as office supplies, telephones and computers.
Drawbacks Related to Business Credit Cards
Even if you qualify for a business credit card, you may have to secure it with a personal guarantee, so it can affect both your business and personal credit scores. The Truth in Lending Act and Credit Card Accountability, Responsibility and Disclosure (CARD) Act apply only to personal credit cards.
Business credit cards have fewer protections. Teaser rates can disappear and rates can be instantly raised without advance warning. They may provide shorter times between billing and payment due dates. There is no legal limit on late fees or over-limit fees.
How payments are applied is also different. Where payments on consumer credit cards are applied to the balances with the highest interest rates, on business cards issuers can choose to apply them to the balances with the lowest interest rates, increasing the total paid, possibly substantially.
Positive business credit marks may not show up in your personal credit history, but negative ones definitely will.
Qualifying for a Business Credit Card
According to Mercator Advisory Group, in 2017 small business credit cards were a $500 billion spend category. American Express no longer dominates as other issuers are now competing to provide cards to business owners.
Hopefully, this competition will result in issuers providing better protections and rewards to encourage usage. TD Bank reported in April 2017 that 46% of small business owners use a business credit card and another 7% plan to apply for one within a year.
Companies with more employees and higher revenue enjoy higher approval rates than small businesses, especially when new.
Credit Card Agreement Database
The Consumer Financial Protection Bureau provides a free credit card agreement database searchable by card issuer. Use it to compare the fine print on personal and business credit cards you are considering. But keep in mind that agreements can change at any time for business credit cards.
There are more restrictions on how often and how agreements for personal credit cards can be altered. But they can also change with sufficient notice. By keeping your credit score as high as possible, you will be in a position to negotiate for lower interest rates or to change issuers to obtain better terms.
Should You Use Credit Cards to Fund Your Business?
Launching a small business is never without risk. Be sure to examine all your other options before using credit cards. Plan carefully, or the interest payments and late fees could cause both business and personal failure.