Should you use a credit card to fund a startup business?

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Ask a Lender
July 19, 2017 | Updated September 25, 2017


Key Points

Thinking of funding a startup with a credit card?

  • Easy qualification
  • Quick to obtain
  • You can be personally liable for company debt
  • Your personal credit score can be affected by repayment activity

Securing financing for a startup business can be difficult. Most startups lack a history that lenders can review to determine whether the business is able or likely to make its payments. In short, startups lack what are called the “four Cs” of business credit:

  • Capital. Capital consists of a business’s assets, such as equipment or product inventory.
  • Collateral. A business can use collateral — cash reserves of other assets — to help back a loan, making it a less risky proposition for lenders.
  • Capacity. Capacity refers to the business’s capacity to repay the loan. New businesses don’t have a track record to demonstrate to lenders they can pay back a loan, which makes them seem like more a risk in lenders’ eyes.
  • Character. A business’s character entails its financial history, including its credit score. Since startup businesses lack a credit history, lenders may look at the owner’s personal credit history to help them decide whether to approve a loan.

Because startups typically don’t have the four Cs under their belt, it can be tempting for new business owners to reach for a credit card to help pay business expenses — whether it’s a business credit card (assuming the business is able to obtain one despite having no credit history), or a personal credit card taken out in the owner’s name.

But is starting a business with a credit card a good idea? Although such a strategy can work if other alternatives fall short, be aware that using a credit card to finance a startup business comes with risks.

According to research from the Ewing Marion Kauffman Foundation published in 2009, every $1,000 of credit card debt a business takes on increases by 2 percent the chances the business will fail.

Business owners who can’t obtain a business credit card should think carefully about using a personal card. If the business fails, your personal credit is on the line, especially if you can’t make the payments.

Incorporating the business as a limited liability company offers some protection from personal liability for debts the business incurs. Be aware, however, that even if you incorporate, you could still be on the hook for the business’s debt in certain circumstances — including credit card debt – regardless of whether it’s your name or the business’s name on the card. If you have any doubts, consult an attorney who can walk you through the nuances of your business’s legal structure.

Also, take note that in some circumstances, taking out a business credit card could affect your personal credit score. It depends on whether the credit card issuer reports the account information to the credit reporting bureaus. It also depends on whether you are listed as a cosigner or guarantor on the card, and if your name is on the account in addition to the name of the business. If your name is associated with the account, it may be reported on your personal credit profile.

So, is it a good idea to use a credit card to fund a new business? It’s risky, so if you decide to proceed with that strategy, do so with caution. Make sure you understand the risks and take measures to minimize them.

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