Since personal savings and contributions by family and friends have their limitations, you can consider using credit cards to fund your e-commerce business in its early stages due to its convenience. However, while credit cards provide easy access to the much-needed funds, it can also snare you in a mountain of debt. Credit card debt can not only be very expensive but end up preventing further access to funds and ruining your credit score. A quick look at whether using credit cards to fund your startup is really a good idea or not.
Top Reasons to Use Your Credit Card to Fund Your Business
Financing is easy to get: While more than a third of the respondents in the Consumer Financial Literacy Survey conducted by the National Foundation for Credit Counseling in 2018 said that a bank, credit union or a private online lender would be their first choice for business funds only seven percent thought of credit cards. However, in the early stages of your startup, getting finance from conventional banks tends to be difficult due to the absence of a track record. Further, banks generally insist on industry experience, comprehensive documentation, a good credit score, collateral assets, as well as a significant contribution to the equity.
Apart from a strong credit report, you don’t require anything else to get a business credit card to buy whatever you need for your business operations. The card issuer has no requirement of business documentation, no need to know the end use of the funds, or any collateral or complicated application procedure every time you need to access the money. A business credit card, therefore, represents a very convenient, flexible, and quick means to fund business activities in comparison to traditional credit that has bureaucratic processes not suited to the dynamic nature of e-commerce business environments.
You can separate business expenditure from personal spends: If you are wary of mixing business and personal expenses when using credit cards, the good news is that you can have a separate business credit card that will allow you to charge your business expenses to it. You can use a personal credit card for your personal charges and keep free your credit card limit for your own expenses instead of using it up for business purposes. There is no difference in the process of applying for a business card compared to a personal credit card. The evaluation will be done on the basis of your income and the credit score and will also typically offer various reward schemes and bonuses that you can use for your business. You should try and settle the monthly dues in full else, the interest rate applicable to the roll-over amounts are typically very high and usually much more than conventional bank loans. If you do accumulate debt then try and take advantage of balance transfer schemes and any low introductory rates that will help you save substantially. If your credit card debt is completely unmanageable, you can get a debt consolidation loan from any of the leading private financiers like Nationaldebtrelief.com that will help you to save substantially on the interest.
Manage your cash flow better: Since credit card bills are payable monthly, you can swipe the card more at the beginning of the cycle and enjoy a long interest-free period before you need to settle your dues. So, if you are purchasing supplies for your business, use the card for the expenses early on while it can be helpful in maintaining a good cash flow because you can use the materials for manufacturing, realize the sale proceeds from customers, and pay off the card balance without incurring any expense on interest. However, this only works if you have a disciplined approach towards using the card.
Permits easier tracking of expenses: In the early days of an e-commerce startup, it is quite likely that you may not have dedicated resources looking after the accounts and with your busy schedule; you may not also have the time to track and classify every business expense. When you use a credit card, you receive an itemized statement that you can use to make your accounting entries at the end of each billing cycle. If you track the credit card spends online by logging into your account, the monitoring can be even more close and you can easily find out if you are going over-limit or spending more than you have budgeted for.
The Disadvantages of Using Business Credit Cards
You remain personally liable: Even though the credit card may be issued in the name of the business and is distinct from your personal card, typically, all business card transactions have to be guaranteed by the business owner. When you have a partner or employees who are also authorized to use the card, things can get complicated if they perform unauthorized transactions. Regardless of the actual situation, you remain personally liable to the card issuer for the transactions. If the transactions are very large and you can’t pay them, you run the risk of spoiling your credit score and affecting your ability to secure financing in the future.
Too easy access to credit: Generally, entrepreneurs are extremely optimistic about their businesses and when this is combined with plastic money, it can easily mean quick running up of debts that they find very difficult to get out of. Coupled with the fact that most e-commerce businesses fail within the first few years, the debt exposure of credit cards can ruin your personal financial security. While credit cards are fine for small business expenses, trying to run the entire business on credit card debt is unwise and very expensive.
Making detailed financial forecasts is vital for the success of any e-commerce business; otherwise, you can find yourself strapped for cash just when you need it the most. It is good sense to examine all the sources of funds before you think of using your credit cards to fund your business operations. Consulting with a financial advisor can be a good idea to determine if indeed and to what extent a business credit card can be used profitably.