Business Loans

How to Use Personal Credit Cards to Start a Business

EPF Last Update: May 21, 2020

Credit cards remain one of the go-to resources for cash-strapped small business owners. Why? Credit cards are one of the easiest financing resources to qualify for.

In this article, we are going to teach you how to use personal credit cards to start a business and keep it funded as you grow.

Personal Credit Card vs. Business Credit Card

Right about now, you are probably wondering whether it is better to use a personal credit card or a business credit card to fund your business.

Most business owners use both to fund their business. Some personal credit cards explicitly prohibit cardholders from using the card for business purposes, so you should be sure to read the details in your cardholder agreement. But many businesses, especially startups, rely heavily on personal funds and personal cards in some of the startup costs of the business.

A recent study revealed that a whopping  22 percent of small business owners use business credit cards as their top resource when accessing funds. According to the same study, 24 percent of small business owners use personal credit cards as their top funding resource.

A business credit card, however, has a distinct advantage over a personal card — if you pick the right card, it can help you begin building business credit by reporting to one or all three of the major business credit reporting agencies. That business credit profile can come in handy down the road for accessing new types of business financing as you grow.

Business credit cards are still primarily underwritten based on personal credit scores, just like consumer credit cards. That means if you have a great personal credit score, the benefits of opening a business credit card over a personal credit card are clear. If you have bad personal credit, there are few business credit card issuers who will approve you for a card, and personal cards that allow use for business purposes may be your best bet depending on your credit purposes.

As your company continues operating, generating profits, paying down debt, opening new trade lines, expanding and growing, it will then become much easier for you to successfully apply for business credit cards for your future funding needs.

But Wait – Is it Smart to Mix Personal Finances with Business Finances?

For general purposes, the answer here is “no.”

But personal credit cards work a bit differently than other funding sources.

In fact, credit cards have some hefty purchase protections built in that you won’t find in a bank loan (even if you could get a bank loan as a small business nowadays).

Let’s take an example to illustrate this point. Say you decide to use your personal credit card to fund the purchase of raw materials to make products for your new business.

The materials arrive and they are defective. If you had paid by check or debit card (or, heaven forbid, cash) you would be out the funds with little recourse except to take legal action.

But you were smart and paid with a credit card. Now you can dispute the transaction through your credit card company and receive their help resolving the issue. Your credit card company will withhold the funds until the vendor makes it right.

It’s Smart to Use Multiple Funding Sources

Even after the startup phase is finished, businesses still need financing as they grow. In fact, cash-flow problems during the growth phase can be much harder to manage than when a business is young.

The truth is, you never know when today will be the day – the day when you need a sudden infusion of capital to fund a huge customer order, expand to a new location, hire additional staff or do something else to take your small business to the next level.

You don’t want to lose that golden opportunity because you don’t have the extra cash.

Nope – you want to be on it. You want to be ready and raring to go, chomping at the bit to welcome every opportunity in and seize success.

Strategize Today for Tomorrow’s Rainy (and Sunny) Business Days

Now, it is important to understand you shouldn’t just run out and start applying for every credit card offer you can find.

That can quickly turn into a pricey proposition. Just as not all types of financing are created equally, so too there are more and less valuable credit card offers.

The terms of the credit card matter a lot. The following three factors can be important decision-making criteria as you scale up:

  • Ongoing APR. You may need to carry a balance from time to time in order to combat cash flow problems. A low ongoing APR can keep those interest costs low while you wait to get paid by your customers or ride out a slow time.
  • Comes with a 0% introductory offer (i.e. 0% interest assessed on all purchases made for an initial time period, say six to 12 months).
  • Adds other perks like bonus airline miles, a cash-back feature, a cash bonus after a certain amount spent in a certain time period.

The better your personal credit score, the more likely you are to qualify for these types of offers.

Funding your business on 0% interest for the first 12 months can make all the difference to a new small business. However, financing your business long-term off of credit cards can be risky if you’re paying normal rates at 15-25%, so you need to be smart about how much debt you take on in your business.

You also want to be strategic in terms of how and when you apply. Ideally, do your research first and then pick one day and complete all your applications on that day.

Taking this approach will minimize the impact to your credit report and improve your chances of getting approved.

Best Practices for Managing Personal Credit Cards for Business

Once you are approved for each new credit card, you will need to stay on top of how you use them.

First things first: always try to pay off balances before they begin accruing interest. Otherwise, using personal credit to fund your business can get expensive. If you get a card with a 0% interest introductory offer, then you could have up to 12 months to pay off that initial debt.

Second, every year, call and ask for a credit limit increase (if one isn’t freely offered). This helps you increase the amount of funds you have available to you long term and could benefit your personal credit score as well by keeping your balances low compared to your total credit limits (an important personal credit scoring factor).

Finally, if your personal credit score is in a good place, a business credit card is simply a must. You can use it to build business credit and many business credit cards don’t report basic activity to the personal credit bureaus, so you can help protect your personal credit from a month when you max out your business credit card and have high utilization.

If used wisely, personal credit cards can be a huge advantage for the savvy small business owner.

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