In the best of economic times, starting a new business is difficult. When the economy is not strong and credit is tight, financing a startup moves from being just difficult into being challenging. Banks and other traditional financial channels are not making loans and are not especially open to financing new businesses, regardless of being presented with a top-notch business plan. When traditional loans are unavailable, the first thought many have is to use their own personal credit cards. For entrepreneurs thinking of this it’s good to know the best way to use credit cards and how to make credit card processing work to their benefit.
It’s always risky to use personal credit cards to finance a startup because an entrepreneur is opening up his personal assets to loss. However, those with a solid business plan and are already managing their personal finances wisely may be able to do this without harming their credit scores or financial future. Using credit cards for financing has several positives: financing is fast; purchases can be made instantly; expenses can be tracked accurately; and, bonuses and travel rewards may be earned.
Two of the best ways to use personal credit cards in starting up a business are to buy equipment and provide working capital. Credit cards can be used to acquire the basic assets any business needs to start: PCs; a fax machine; a copier; telephones; scanners and any other equipment essential to business operations. These items require no money down and the monthly payments, spread out over time, should be manageable. A financial plan should include paying off these balances within the first few revenue cycles.
A second good use of credit cards is in providing the business with a method of cash flow management at the beginning. This requires having more than one credit card and having knowledge of the techniques of credit card processing. By skillfully managing the balance transfer process among two or more credit cards, an entrepreneur may be able to gain 60 to 90 days to pay an invoice successfully. This gives a startup some working capital and buys time until sales become consistent. Knowing the billing dates of credit cards is also important. Save making large purchases until just before the billing date. On many cards, this keeps interest from accumulating for weeks until a payment is due. If possible, pay off the balance each month. This saves interest and preserves the amount of available credit on the card.
If managed well, using personal credit cards to start a business can work. Once sales have stabilized and a breakeven point reached, an entrepreneur should again seek out traditional loans or lines of credit.