To help kick-start a new business with new capital, a common tactic is to lean on plastic.
One of the world’s most successful businesses was launched on the back of credit cards. Two students at Stanford University — Sergey Brin and Larry Page —spread $15,000 across three credit cards in 1998 to buy disk space to accommodate the growing use of a search engine they had developed, “Google.”
“Search kept growing, and we got more and more users coming every day, and we kept running out of computer power,” Page recalled in a 2003 interview with NPR’s Terry Gross. “In fact we would go down to the loading dock at the computer science building … and sort of borrowed the ones that were sitting there before the people who had really gotten them on their grants got around to that.
“Eventually that became unscalable and we decided we could get could better resources if we started a company,” Page said. “We went out and bought a whole bunch of disks on our credit cards, and then we were committed.”
Your company may not be the next world-changing startup, but if you’re trying to get your business off the ground or expand it, a business credit card can be a lifeline — especially in the wake of the 2008 credit crisis. The amount of money given in small business loans has declined 20% since the financial crisis, according to a Harvard University study.
Here are some of the reasons why many fledgling firms today use credit cards to jump-start their business.
Provide working capital as a line of credit
Getting working capital is much easier via business credit cards than navigating the rigmarole surrounding small business loans. This can be especially true for seasonal businesses, said Craig W. Smalley, an accountant and financial advisor who specializes in working with small businesses. “In a seasonal business, you can live on credit, and your season kicks in, you can pay the credit card off in full. It is a very easy, simple way to get credit,” he said.
And seasonal businesses don’t just mean fireworks vendors setting up for the Fourth of July or yard-care businesses preparing for the spring thaw. “I have a client that supplies auto parts for people who want to trick out Nissans,” Smalley said. “His big season is tax refund season, because that’s when people splurge on their vehicles.”
Check out our tool for finding the best business credit card here.
Save on interest costs
Shifting debt between credit cards with 0% APR on balance transfers allows new business owners to save money on interest and repay existing debt at a faster pace.
“This is common for businesses that are stuck in the startup mode for a year or two, or for a company that is looking to expand and not seeing revenue for a little bit of time,” Smalley said. “For instance, you can get one credit card with a 0% APR for six months, and if you don’t have it paid off, you can get another card with 0% APR and just transfer the balance.”
Earn rewards on spending
With certain credit cards, you can earn rewards for spending on items you would buy regularly anyway — for example cash back on gas, traveling, phone, Internet or office supplies.
“This is popular with clients who are savvier and more selective about using credit cards … especially popular for clients who travel a lot for business,” he said. “Then there are cash back rewards — those are the two most sought after credit card perks for small businesses.” You can find a list of some of the best cash back rewards cards here.
Build up your credit score
By making timely payments each month and keeping a low balance on the card, both your business credit score and your personal credit score can improve. This can lead to more attractive loan opportunities down the line to grow your business.
Of course, this is a double-edged sword. Credit problems with your new business almost always cascade to your personal credit score. “Unless you are a big company, you are personally guaranteeing credit cards and loans,” Smalley said. “No one will give your business credit without you personally guaranteeing the debt, even if you are incorporated.”
He noted that “you have to be making several million to even think about getting a nonrecourse loan,” unless the business has property or inventory that can be used as collateral. “Even then it isn’t very easy to do,” he added. “For example, if you use inventory as collateral, you can typically only use 30% of its value [to secure a loan].”
Separate personal and business expenses
The first thing Smalley advises new small business owners to do is get a separate credit card for their business, whether it’s in their name or the name of their company.
“It’s just a smart thing to do to keep those separate,” he said. Using a dedicated business credit card helps you track expenditures and keep your accounting distinct.
Some things to watch out for when hunting for a business credit card:
- High annual fees. Some cards may not be worth the fee, while others may waive the fee for the first year. Fees are an important factor to account for.
- High ongoing APR. After the 0% introductory offer expires, the interest rate can skyrocket. Make sure your balance is paid off in full before the 0% offer expires.
- Late payment fees. Always make at least the minimum monthly payment — many 0% deals are null if you miss a payment, and you’ll be on the hook at a much higher interest rate. Set up automatic payments or email reminders.
Finally, avoid using the cards for cash advances, which often carry automatic high interest rates. “If you’re using credit cards to make payroll for any employees, you’re in big trouble,” Smalley warned.