by Kristen Gramigna
As every new business owner knows, companies need capital. Credit cards can provide that capital for growing companies, and they have attractive benefits — but they also have potential dangers. Here’s a look at the basics of using credit cards to fund your company.
Funding your business with a credit card is easier than getting a traditional loan, but interest rates are much higher with cards that are designated “business cards.”Keep this in mind, as debt this expensive could eat a portion of the revenue you are generating. If you’re using a credit card to fund your business so as not to sacrifice equity to investors, you’re trading investments for debt that could have a very high fee. This debt could also bring your business down if you come upon hard times.
The Credit Card Accountability Responsibility and Disclosure Act of 2009 (Credit CARD Act), which mandates protection for personal credit cards, does not protect business credit cards. This means that rate increases could come with no warning and be retroactively applied to any outstanding debt. This lack of protection also extends to fees; late fees and over-limit fees are unrestricted for business credit cards.
As long as you are making your payments on time, a business credit card will enhance your personal credit score as well as your business’s credit score. However, late payments will damage these scores, hurting your ability to get a loan as your business grows. Furthermore, small business owners are held personally liable for business credit card debt, so all of your late activity is reported.
An upside to a business credit card, and something to consider when choosing one, are the various perks available. Depending on your direction, you could earn airline miles, discounted gas or cash back. What’s more, if you embrace your business credit card for use on daily expenses inside the business, it will aid you in record keeping and help you separate personal and business finances.
When your startup is young but needs capital, credit card funding makes sense, but should be used in moderation. Always scrutinize the fine print of any credit card you’re interested in, and if you need to, relay as much as possible on personal funds, family, friends or other investors. If you decide that the quick capital and various perks associated with business credit cards are worth the higher rates, fees and other potential pitfalls, then keeping these basics in mind should keep you in good shape.
Kristen Gramigna is Chief Marketing Officer for BluePay, a firm that offers small business credit card processing services.She brings more than 15 years of experience in the bankcard industry in direct sales, sales management, and marketing to the company and also serves on its Board of Directors.