Eric had the option to ask friends and family for funding his business, but he wanted to be more independent in terms of borrowing money and of course, he didn’t want to share profits on investment, so pitching any private investors was not something he wanted to go for.
He had options like applying for the business loan, online installment loans for startups, merchant cash advances for small business and even using the vehicle as a collateral against a business loan, but all these have a high-interest rate and moreover, the bank loan application takes long to get accepted. So, the fastest and more reliable way for funding his business was the credit card.
Well, this is truly the quickest and hassle-free option to fund your startup, but wait, before following Eric, you must make sure if credit card funding is right for your startup or not. So, let’s see when credit card funding is the right option and when it is not.
1- It’s Risky
Beware of the fact that using credit cards as a main form of financing is risky! Very risky. Delaying payments can adversely effect your credit score which will ultimately shade your chances of getting a business loan later.
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In a case of business failure, you may have to face the debt alone and failing to pay your credit card debt in the certain time period may lead you into legal complexities as well.
2- It’s Fast & Cheap
Credit card funding is fastest as well as cheaper than a small business loan, so when you have to choose between the two, credit card is the best option. So, must have this option in your emergency funding plan to avoid running out of cash when needed!
3- Know When Credit Card Funding is Not the Right Choice!
If you are working on a product that needs more than six months to be available in the market, credit card funding is probably not the right option.
You may look for an alternative source of funding (a well-thought crowdfunding campaign can go very well) that particular period and once the product is in hand, you may switch to the credit card to meet the marketing cost and other overheads.
4- Know When it is Best to Use Credit Card as Funding Source
For entrepreneurs who start a part time and plan to turn it into a full time business later, credit card funding is probably the best option as it allows them more flexibility, plus you already have a stable source of income which can pay the credit card bills till you become your own boss.
5- Do an Extensive Research When it’s the Only Option You Have
Credit card funding is the convenient option, but be very much careful to take it when it is the only option, i.e. make sure your credit card payments are on time, otherwise the added costs will make it more expensive.
Moreover, non payments or delayed payments accumulate to a bad credit history which can be a hurdle on the way to startup growth.
The Bottom Line
Considering the points above allows you to avoid uncertainties with your startup funding. But you may take the risk as well, depending on how valuable business ideas you have, your particular situation and the backup plan for emergency startup funding that you have.