Regardless of what your startup idea is, you’ll need some funding if you want to make it a reality. This article, which focuses on credit cards, provides a look at some lesser-known things that can go wrong–and tips for doing things right–when funding a startup.
Credit Cards: Cons
Credit cards are a common funding source for startups, but they have two large downsides. The first is that, compared to other sources of credit, credit cards have high yearly interest rates, currently averaging around 15%.
The second downside is that if you’re a sole proprietor and you use your credit cards to fund your startup, you’re on the hook to repay the money yourself if the business goes under. Even if you have a partner, you may still have to repay all of the money if a business fails, should the partner be unable to repay their share.
Credit Cards: Pros
Despite the cons, there are several reasons credit cards are an extremely popular option for startup funding. For one, they allow you to be responsive: A credit card allows for much quicker purchasing reactions than a loan.
Another reason is that a certain type of card–business credit cards–may offer rewards, such as cash back or travel miles. Additionally, applying for business credit cards isn’t that much more complicated than applying for a personal one.
Credit cards also do a form of accounting for you: They list every purchase you’ve ever made, and may even break it down by category.
Tips for Using Credit Cards
Be frugal: Remember that credit card companies want to make money off of you. Before you spend anything, ask if it’s really worth the interest you’ll end up paying for it.
Plan it out: You should have a plan for repaying every dollar you spend on a credit card. Always remember to factor in interest, and remember that minimum monthly payments are a slow, expensive way to repay.
Have other options: You won’t want to rely solely on credit cards forever. As your business grows, begin to investigate other options, like loans or lines of credit.