Startup Business Loans: Using Credit Cards

Around 80 percent of small businesses rely on credit cards for some type of cash flow, making it one of the most common ways to fund a new startup. While credit cards may not be your only form of start up business financing needed, if you’re smart about how you use credit cards, you can get some big financial bang for every buck you’re already going to spend on your new company.

Because startup spending can get out of hand fast — and because credit card fine print often makes the details elusive — we’ve outlined some of the most important factors in using credit cards to fund your startup.

Who qualifies to use credit cards to finance a business?

If you qualify for a credit card, you qualify to use it for your business. Outside of fraud and illegal purchases, you can use your card to pay for what you want — though you’ll definitely need more than a $300 credit limit to drive your startup. Qualifying for larger balance cards — such as cards that allow you to spend up to $5,000 at a time — usually requires a strong credit history and a FICO score of around 680 or higher.

The pros and cons of using credit cards for your startup

Using credit cards to finance some of your startup costs has some big benefits.

  • If you already have the cards, you have immediate access to working capital.
  • Credit cards are easy to qualify for if you have the right credit history and income/debt ratio, so you don’t need a winning business plan or pitch.
  • You can use the credit card as a revolving credit line, which means once you start paying on your first purchases, you can make other purchases — unlike with a one-time bank loan.
  • Credit cards provide some flexibility in how and when you pay for startup costs.

The obvious downside to funding your new company with credit cards is that you could end up paying a lot of interest if you aren’t careful. In June 2018, the average APR on business credit cards ranged from around 13 percent to close to 20 percent. If you can’t afford to pay balances off quickly, you could rack up hundreds or even thousands in interest expenses.

How to minimize the cost of financing your new company

Luckily, with the right credit and some credit-card know-how, you can often avoid the interest trap, minimizing the cost of funding your startup. Here are two ways to do so.

Look for introductory low APR offers

If you know you’ll need to make a major capital purchase when you launch your business, look for credit cards with low APR introductory offers. You may be able to find a card with a 0 percent APR offer for up to 24 months, which means you have two years to turn your investment into a profit and pay off the balance.

It works like this:

  • You apply for and receive a card that has 0 percent introductory offer for 18 months.
  • The card has a credit limit of $5,000.
  • You purchase equipment for your small business at a total of $4,000.
  • You have 18 months to pay off that balance before interest accrues.
  • That’s around $223 a month, if you make a payment every month.

The best thing is that you didn’t pay any interest for that loan — you funded your startup virtually for free.

Put bonus structures to work

Another way to reduce the cost of funding your startup with credit cards is to choose a card that has a great rewards and bonus structure. You can choose from cards that offer cash back rewards or points or miles on travel, whichever is more applicable to your business.

If you know you’ll need to travel a lot of the first year your business is open, funding your startup with a travel rewards card means you could save thousands on travel expenses. If you choose a card with a big sign-up bonus, you may even earn more in rewards than you pay out in interest and fees, which makes this type of financing an obvious accounting win.

Business owners that won’t be traveling or can’t use other forms of rewards might consider cash back credit cards. These cards typically reward you with 1 to 5 percent cash back on all your purchases — effectively providing a 1 to 5 percent automatic discount on any startup expenses you cover with the card. Depending on how you manage your account, the cash back can be more than enough to cover the expenses of financing your startup via a credit card.

What types of cards should you use to fund your startup?

If you plan on using credit cards to finance your new business idea, consider choosing more than one option. You get different benefits from low APR cards than you do from travel rewards cards, for example, so you might be able to address varying business concerns with each card.

You’ll also need to decide whether you want a business credit card or a personal credit card. Business credit cards may require some financial history for your company, making personal cards easier to obtain. Business cards sometimes come with higher fee structures, but those are offset by perks like special discounts, access to organizations and the ability to have multiple cards and users on one account.

Seek Tip: No matter which card you decide to use for your business startup, avoid mixing and matching with your personal expenditures. If you use your personal credit card for groceries and business expenses, it can become cumbersome to track these details — and the details matter greatly for financial reporting and tax purposes.

The bottom line on funding a startup with credit cards

Many business owners use credit cards to cover capital needs both during startup and as a normal course of business. We think credit cards are a safe, viable solution for entrepreneurs as long as you know how to play the credit card game and manage your business income and expenses wisely.