When it comes time to generate capital to start a business, there are many possible routes to take. Since everybody is in a unique position, the way you move forward may not be the same as others within your industry.
Ideally, you would be able to get up and running with cash you have saved. This allows you to take control of your business from the very start, without having to be concerned with any debt.
Unfortunately, most people find that they don’t have enough liquid cash to do this. Subsequently, they begin to consider other methods, including bank loans, loans from friends and family, and credit cards.
For the sake of this piece, we are going to take a closer look at the pros and cons of relying on credit cards for startup costs.
Benefits of Using Credit Cards
There is no denying the fact that many people feel this is a bad idea. However, it is growing in popularity across the globe, and for that reason is worth examining.
Here are three benefits of relying on credit cards to start a business:
1. Low introductory rate. If you have solid credit, you can likely find at least one credit card that offers zero percent APR for six months or longer. This means you will never pay a single penny in interest as long as you pay off the balance before this period ends.
2. A simpler application process. Have you ever applied for a bank loan? If so, you know just how long it can take. Not only is the application complicated, but you also have to wait around for a decision.
With a credit card, you can generally submit your application online and have an answer immediately. From there, it will not be long before you are using your credit to get your business off the ground.
3. Reward points. You shouldn’t put too much weight on this detail, but it is something to consider. If you opt for a credit card with a rewards program, you will receive points for every dollar you spend. These points can then be used for everything from travel to office equipment and much more.
Why not get something in return for all that money you are spending?
Drawbacks of Using Credit Cards
Now that we have the primary benefits covered, let’s take a closer look at a few drawbacks:
1. You may not be able to get your hands on enough money. This all depends on how much capital you require, but many people find this to be a problem.
One solution to this issue is to apply for multiple credit cards. If you are going to do this, be careful that you don’t get in over your head. As long as you have good credit, don’t be surprised if you can continually apply for and receive another card. This can be dangerous, as it will put your business in a lot of debt early on.
2. Interest can pile up. Even if you opt for a credit card with a zero-percent introductory rate, at some point the offer is going to expire. It is then that you will find out just how much your minimum monthly payment really is.
If you think the interest on a bank loan is high, you may be shocked to find some credit cards hitting you with a rate of 20 percent or more. Do you mind paying this much in interest?
3. The debt is not going away. Imagine this: you charge tens of thousands of dollars on credit cards, just to find your business going under anyway. Your business may be gone, but the debt is still there. You will have to pay this money, month after month, along with any interest.
Yes or No?
Now that you know the pros and cons of using credit cards to start a business, you have to decide if this is something you want to do.
Make your final decision based on your findings, the amount of money you need, and the other options you may have available.