Maybe you’ve heard about a successful entrepreneur who launched his or her company using their own credit cards. Occasionally, an independent movie that was produced on the filmmaker’s credit cards is critically acclaimed and gets widespread play.
As interesting as these success stories may be, what you don’t hear about are the hundreds of other businesses that are launched using credit cards, end up failing and the founders are left with a mountain of personal debt to figure out.
If you’re thinking of using personal credit cards to put your plans for a small business into action, be sure you understand the risks involved and the reasons why many feel this is not a good idea.
High interest rate
Unless you have a poor credit rating, credit cards are easy to obtain – or at least easier than getting a small business loan. However, credit cards generally have a higher interest rate than small business loans or other lines of credit. It’s easy to get into a situation where most of what you’re paying on a credit card balance is interest and the principle barely shrinks.
It takes a lot of capital to launch a business, more than most credit cards allow. A person funding a start-up this way will likely have to use multiple credit cards, find other sources of funding or risk running out of funds before you’re on solid footing.
Co-mingling business and personal funds
Blending personal finances with business expenses puts you at risk of hurting your credit score if your business hits a cash flow problem.
Risk of misuse
If you have partners and you are using your own credit cards for the business, there is the risk of someone using the card for a purpose that was not agreed on. Also, business partners may disagree on how much debt on a credit card they are responsible for.
There are numerous articles online that share tips and positive stories about starting a business with credit cards. Understand the risks and maybe even confer with a business lawyer before going this route.