Even though venture capitalists are practically throwing money at startups, at least 91% of that funding goes to men. Though grants for female entrepreneurs do exist, competition is fierce, and a one-time grant of $20,000 may not be enough to finance your business.
According to the Federal Reserve, nearly 80% of all small businesses use a credit card to provide working capital.
Credit cards do have some advantages over other forms of funding, but they also entail more risk. Given small business lenders’ skittishness, are credit cards a viable funding source?
The advantages of plastic
The most significant advantage of using a credit card as a source of capital is its flexibility. Banks traditionally give loans in fixed amounts, so you might end up paying interest on money you have no use for. Similarly, venture funds have an incentive to get you to take as much money as possible, and therefore give up as much equity as possible.
With a credit card, however, you essentially get a loan that exactly matches the amount that you need, so you don’t pay for funds you don’t use.
The terms of a business credit card are often more favorable than those of a personal credit card. In general, interest rates are lower, and rewards programs are more closely tailored to business spending (i.e., FedEx, office supplies, travel).
Credit limits are often higher, ranging from $25,000 to $100,000 on a single card, as businesses tend to borrow in larger amounts than do individuals.You can have multiple employee credit cards for the same account, and expenses are easier to track.
Finally, you can use both your personal credit history and your business to establish the terms of your credit card. If you have stellar credit, you’re more likely to be approved for a card.
On the other hand, if your credit score leaves something to be desired, you can demonstrate your business’ s viability with proper documentation, insurance and the like.
Potential downsides, and how to avoid them
Financing a business with a credit card does pose certain risks, however.
First, small business credit cards are not covered by the Credit CARD Act of 2009, which grants personal credit cards protection from arbitrary, unannounced and sustained interest rate hikes and other tactics. Though a few banks (namely Bank of America and Capital One) have adopted some of the act’s provisions voluntarily, most issuers will not abide by the CARD Act’s rules.
A personal credit card can, of course, be used for business expenses, but will probably have a lower limit and higher interest rate.
What’s more, a business account with your name on it will reflect on your own credit score, regardless of who else is on the account. Though Fair Isaac weights its score caluclations toward personal cards, missed payments and high debts on a business credit card will negatively affect your score.
If your business dissolves, you still be on the hook for credit card debt. Most issuers require that both you and your business be liable, so even if the corporation goes under, your credit company might sue to recoup its losses. Read the terms carefully before signing.
Alternative funding sources
In addition to the funding sources that immediately come to mind, such as investors and small business loans, there are a number of more accessible methods of raising capital. According to the Federal Reserve, more than 70% of small businesses began with personal savings. Other businesses have taken out lines of credit from suppliers, or borrowed money from friends and family to get off the ground.
At the end of the day, credit cards are one more possibility for entrepreneurs in the face of tightened purse strings.
Image: doyoubleedlikeme via Flickr, Creative Commons
Anisha Sekar is a content manager at NerdWallet, a credit card website helping entrepreneurs find the best small business credit cards. Named Money Magazine’s #1 credit card website for 2010, NerdWallet analyzes cards from credit unions and banks large and small to give our users the best offers possible. Sign up for their rewards credit card newsletter to hear about the latest deals.