Should you use personal credit cards for small business financing?

January 16th 2013

With a dearth in the availability of traditional finance sources as a result of the recession, credit cards maybe a great option for those who are starting small businesses. Some may choose credit card funding because of the lesser hassle it has when it comes to paperwork that other banks might require to maintain. It is true that credit cards fill the void that small business owners have when it comes to finances, but has it own share of problems.

Things you should know before financing your business

If you are using your personal credit card to start your own small business, you are taking quite some risk. If you cannot start off your business as intended, you will already have uncurred a big amount as debt and no business to generate revenue that will pay off your dues. If you don't have business credit yet, it i still better to turn to family and friends for help rather than use your personal credit card in this case.

For starting a small business, you may seek loan from the bank. If you are not successful (chances are low), then you may use any personal savings that you may have. Personal credit cards should be kept as the least option. If you really have to use your personal card for your business, here are a few things you should keep in mind:

  • Rectify personal finances: Check your credit report to see if things are in order. You must have a great score and a clean report to be able to use your card to finance your small business. Most importantly, you must make sure that you can afford to pay the dues you incur. If you can't it is advisable that you stop your attempts. If you have good rating, you may try to negotiate a good rate with the company especially with the huge cash advance that you may need.
  • Use your card wisely: If you intend to buy a house in future, you may not want to use your credit card to set up your business. You should stabilize your future since with a low credit score you won't have much chance of borrowing more money in the future. Make your payments on time but keep in mind that a large amount of money borrowed on your card will still lower your score.
  • Rising interest rates: Credit card companies may raise your interest rates as you begin financing your business using your personal cards. To avoid this, you may want to find card companies that offer fixed rates. A late payment on one card may impact the interest rates on another card as well. So, you must always make your payments on time. Try and pay more than the minimum each month and also don't cross your credit limit.
  • Credit limit reductions: If you are using too much credit card financing, you may run the risk of companies having your credit limit lowered. You may prevent such a situation by quickly drawing down as much as possible in cash advance. Then stick to your credit limit and make payments on time.

It is best that you use business financing to start up your small business. Using personal credit card isn't such a great idea. If, however, you're still using your personal card, you need to be extremely careful.

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