Should you mix personal credit with business finances?
Many business owners face the challenge of keeping their enterprise financially afloat, especially in the early stages. You need seed money to launch your venture, and for many entrepreneurs, your savings won't be enough to continue to fund all aspects of the business.
Growth in sales is always good news, but that same growth also eats up your cash. Down the line, you're likely to encounter expenses and investments you hadn't foreseen; including rent, payroll, insurance and other items.
As your business matures, you're likely to need to raise capital for various payments — such as to pay inventory and a bigger warehouse, hire more staff, expand your office, launch new products or sell abroad. Profitability and growth are regarded as the holy grail for startups, but entrepreneurs still need to tread wisely and carefully. Profitability doesn't always ensure you'll have enough money or trade credit to handle bumps on the road. And it only takes one cash-related emergency to put the business at risk.
Here are different ways you can raise money for your business. It's common for business owners to seek alternative sources of financing which includes credit cards and other forms of personal credit. But before using personal credit to tide over your business, you should compare cards before you decide which ones make sense for your situation.
Pros of financing your business with credit cards
1. You'll retain equity
In general, leverage financing allows you to retain a larger part of your equity. Equity can become very expensive if your venture grows by leaps and bounds since the success of your company will be reflected in a much higher valuation. Thus, high growth is one situation where it can make sense to use debt (i.e., other people's money) as rocket fuel for your venture.
When you're still in startup mode, interested parties may want to lend you money to get the business off the ground, but only in exchange for equity. Personal credit is a key funding alternative, and it can make sense with smaller expenses such as office supplies, travel and office furnishings. Just don't get carried away and buy big ticket items.
2. Get perks and offers
Interest rates are very low and it's an opportunity for entrepreneurs to use cheap debt to fund their business growth. Banks and other card issuers offer card rewards programs to entice people to sign up for plastic. This option provides you with reward points that can be applied towards hotel discounts, airline miles and other deals. These are perks you won't otherwise have with other funding options.
3. You don't need to provide collateral
With credit cards, you won't need collateral, and therefore, the risk to your other possessions and tangible assets are minimized. Larger loans are more complicated since banks can require collateral or a personal guarantee among other requirements. Debt investors also have much influence if you have trouble paying back your loans since they can force your business into bankruptcy. Moreover, venture capital firms and wealth managers will ask for equity before they give you money. Credit cards are a form of unsecured financing that gives you more flexibility.
Cons of financing your business with credit cards
1. Your business is intertwined with personal finances
The first disadvantage when using credit cards to finance your business is that your personal finances get entangled with your business finances. If your business runs into financial trouble, your personal finances could suffer and you may place the financial wellbeing of your dependents in harm's way. Thus, if you have issues with your personal finances, it could negatively affect your business.
2. Your personal credit score could take a hit
Secondly, credit cards can put your personal creditworthiness at risk if you go beyond your means. A bad credit score can hurt your ability to secure future credit such as a car loan or mortgage. It can also prevent you from getting a new job if you ever decide to leave or sell your business. For many consumers, it can be difficult to repair their credit score.
3. The money may not be enough
Finally, credit cards may not provide your business with enough capital. It's often advisable to use plastic on smaller items (like office supplies) to keep card usage within reason. Credit cards have limits. They can be one source of financing and shouldn't be the solution to all of your business's financial needs.
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