October 04, 2022

Michael Bailey

Should you use a credit card to fund your small business?

With risk capital almost non-existent for small businesses that aren’t in the tech space, or lack any significant IP, many entrepreneurs fall back on a source of funding that is most convenient, provides a high level of certainty, and doesn’t ask too many questions – their personal credit cards. This, however, gives rise to a number of issues pertaining to risks, liabilities, taxation, and accounting.

According to a recent study by the Small Business Administration, 46% of new business owners use their personal credit cards to fund various facets of their operations, and it’s not hard to see why. Whether it’s to address short term cash flow issues, fund a critical purchase order, or to purchase assets, or equipment outright, credit cards have a lot of advantages that make them ideal, and even indispensable.

Despite the obvious conflicts, frictions, and issues that arise by intermixing personal and business finances, there are quite a few advantages of personal credit cards that make them a compelling funding source for businesses. In this article, we take a deep dive into the advantages, disadvantages, and risks to draw a clear conclusion on whether you should use credit cards to fund your small business.

How To Get A Credit Card Even If You Have Poor Credit?

Even though getting a credit card is a lot simpler than getting venture funding, or loans approved, it can get a lot more cumbersome for individuals who lack substantial credit history, or worse, have a poor credit score.

If you have a poor credit score, it doesn’t mean you are completely cut-off from credit markets, as there are in fact quite a few services that offer guaranteed credit card approval with no deposit, many of which are included in this CardRates list.

Understanding The Pros of Using A Personal Credit Card

The overall pros of using a credit card for business expenses far exceed simple conveniences, and ease of use, with extensive protections, rewards, and financial benefits in the fray.

1. Convenience & Ease of Use – A key consideration for any small business owner is how quickly they can get access to potential liquidity.

When compared to the arduous applications, compliance requirements, timelines, and restrictions associated with term loans, and lines of credit, just swiping your card at checkout sure seems a lot better.

Getting a loan approved by the SBA can take up to 90 days, with most private banks, and financial institutions faring no better. On the other hand, a credit card is an instant source of liquidity.

2. No Collateral Requirements – While this isn’t entirely true, as most personal credit cards are often secured against savings accounts, deposits, or other fixed assets, they don’t necessarily result in a charge on said assets.

This way, your business assets, savings, or deposits can be used to borrow more in the form of term loans, helping you gain additional leverage while not having to put up your own funds.

3. Extensive Consumer Protections – One of the most compelling reasons to use a personal credit card is the Credit Card Act of 2009, which apart from a wide range of protections, offers consumer’s certainty against ad-hoc raising of interest rates, or excessive hidden fees, among other things.

This makes personal credit cards even better than business credit cards, let alone term loans, personal loans, or lines of credit.

4. Cashbacks, Rewards & Other Deals – Given the intensely competitive nature of the credit card industry, cashbacks, rewards, and points remain part and parcel of the entire experience.

Even though business cards do offer the same, they are unmatchable when compared to the level of savings offered by personal credit cards.

For the discerning user, a credit card can be very beneficial in terms of savings, far outstripping the fees, interest rates, and associated expenses. The key lies in going through, and developing a deep understanding of the terms, conditions, and overall fineprint.

Understanding The Cons of Using Personal Credit Cards

There are certain cons that make just as strong a case against the use of personal credit cards for funding business expenses.

1. High Interest Rates – Credit cards in general involve a higher rate of interest, especially when compared against term loans, personal loans, or business loans.

Depending on the credit score, limits, and the type of card offered, interest rates can go all the way up to 36%.

With this, personal credit cards can mostly serve the purpose of revolving credit, which can be paid back as receivables arrive, and should not be treated like a term loan.

2. Piercing Limited Liability – An LLC or LLP offers business owners substantial protection in the case of failure, losses, or lawsuits, but this protection might get pierced if funding sources are intertwined between person and business expenses.

Most importantly, the founder is personally on the hook for debts and liabilities when using a personal credit card to fund business expenses.

3. Credit Score Damage – Business owners who use their personal credit cards to fund their small businesses risk damaging their personal credit scores.

Even if you pay on time, and follow all the rules of responsibly managing a credit card, certain expenses might come under the category of gambling, or cash advances, which not only attract higher fees and interest rates, but can even dent the creditworthiness of the individual.

Final Words

While there are compelling cases both for and against the use of personal credit cards for small business funding and expenses, the decision ultimately boils down to the financial position of the founder, risks they are comfortable assuming, and prospective funding sources for a business.