The personal credit card, when used properly, is one of the most trusted and valuable tools a startup can use. The trick, of course, is using it properly.
Use Credit Cards to get Started
Most of the expenses involved in starting a new company, from registering a domain name to incorporating to paying for your business cards are done through personal credit cards. Investors and Lenders won’t be a real option to finance any of this activity until after you’ve spent all of this money to show there is a real business to fund.
When not to use a Credit Card
While a credit card may make sense for some basic startup expenses, it’s not a solution for everything. Generally you want to reserve a credit card for emergency expenses and the most essential startup expenses. Everything else should come from barter and sweat equity.
Salaries. Paying salaries is about the fastest way to burn through a credit card balance with potentially nothing to show for it. Unless the people you are paying are going to directly generate income for the business soon (in time to pay down the balance) you should avoid using credit for these expenses. If you’re a professional services company that bills people for time, that might be a better use for credit.
Rent. There are very few instances where paying rent will translate into instant revenue, unless of course you’re opening up some sort of store front. If all you need is an office to work out of, stay at home as long as possible or see if someone will let you borrow a desk at their shop.
Business Credit is really Personal Credit
It’s a little known fact that most startup companies find it difficult to obtain a true credit card that is solely backed by the business. In almost every case the “business” card you’re being offered is a thinly veiled attempt to attach yet another credit card to the Founder’s personal credit profile.
Even cards widely hailed in the business community like American Express, which technically are “charge cards”, only buy you 30 days of credit before repayment and are often tied to your personal credit as well.
It usually takes a few years before the business itself will be able to obtain credit independent of the Founders. Until then it’s all about you.
Credit cards are a major funding source for the majority of entrepreneurs. In fact, it is reported that 59% of small business owners use credit cards to fund their firms. While they often come with high interest rates they can sometimes be less costly than accepting outside capital for your business.
Use credit cards wisely for important tangible purchases and don’t use them for things like celebration dinners. Using them wisely can make them a very beneficial and realistic funding source to kick start your business and move you closer to your goals.