Should You Finance Your Startup With a Credit Card?

Some entrepreneurs consider the route of financing their startups’ operations with the use of credit cards. Although there are some benefits to using credit cards to fund a startup, there are also some cons and pitfalls any entrepreneur looking to utilize this same strategy should also be aware of.

The primary attraction of credit cards is that it lets holders purchase goods and services without having to spend cash for it. For a startup, obtaining cash to spend on the good and services it needs means either waiting for the customers to roll in (the startup may not be at the stage in which it is ready to begin sales) or offering equity to investors (which may be difficult — or impossible, depending on securities laws restrictions). Utilizing a credit card allows the founders to keep equity for themselves rather give it to investors. Additionally, unlike many business loans, credit cards are unsecured and don’t require any collateral to access the credit. Finally, as a practical matter it is possible to obtain credit cheaper through a credit card than a standard bank loan. If a startup can obtain a 0% or low-introductory rate credit card and pay off the balance before the end of the introductory period, the credit will cost less than a standard bank business loan, which can have a rate anywhere from 6-10%, depending on the size of the loan and collateral offered.

Of course, there are significant concerns that entrepreneurs should be aware of before using credit cards to fund their startups. Foremost among these is the possibility of borrowing more with credit cards than the business can afford. With APRs than can stretch over 20% after teaser rates expire, the costs of credit cards can quickly spiral out of control beyond the fiscal means of startups. The amount of money than can be accessed through credit cards is also limited — while credit card companies generally will put a ceiling in the tens of thousands of dollars, angel investors or banks can provide funds in the hundreds of thousands of dollars. Furthermore, using personal credit cards can easily muddy up the accounting of the business, and may potentially be disallowed by the business’s operating agreement (particularly the business paying off the card), and is something I would not do myself. Even if a startup is able to obtain a credit card in the business’ name, the credit card company may require owners to personally guarantee the debt, especially when dealing with startups who usually don’t have significant assets or proven track record of business success — some companies may refuse to issue cards to startups altogether. If the business is unable to pay the credit cards, whether it is a personal card or a personally guaranteed card, the entrepreneur’s personal finances and credit score can be damaged, and the entrepreneur is personally liable for the debt (even if the business has a limited liability shield).

Using a credit card to finance a startup’s operations is a tactic with several benefits, but also several significant pitfalls to seriously consider before going down that route, and should only be considered after trying more traditional (and perhaps safer) funding routes.