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Why Use Business Credit Cards For A Startup?

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By Eva Norlyk Smith, Ph.D.
November 22, 2011

QDear Eva,
I read somewhere that business credit cards don’t have the same protections as personal credit cards. So what’s the point of using them? I currently work full-time, but am thinking about starting my own business. I’m writing up a business plan now. However, I don’t know what type of card I should choose. Do business credit cards offer better perks for entrepreneurs? — Cathy

AHi Cathy,
Sounds like an exciting time for you! Starting a business can be a fun and rewarding adventure, indeed.

It’s not clear from your question whether you are planning to use other funding sources in addition to credit cards. But since you’re working on a business plan—which tells me you’re going about this new venture in a very systematic way—I will assume you’re also looking into getting business loans from traditional funding sources, such as the Small Business Administration, a bank line of credit or even angel investors.

Being a woman business owner, you may also be eligible for special grants or loans with particularly favorable terms.

So that brings us to your question. Yes, indeed, business credit cards don’t have the same protections as personal credit cards or other types of business loans.

So what’s the point of using them? Good question. Ask EvaCompared to other funding sources, business credit cards offer extremely easy access to a line of credit.

You don’t have to go through a lengthy application process involving financial statements and long-term financial projections. And anyone with excellent credit can apply online for a business credit card and, in some cases, be approved almost instantly.

Compared to personal credit cards, most business credit cards also offer a much higher line of credit, with starting credit limits as high as $20,000 and growing to $100,000 or higher as the business grows.

Combine those high credit limits with the ease of application and you will understand the lure of business credit cards for busy entrepreneurs who like to keep things simple.

In fact, according to a recent survey by PNC Financial Services Group, a large number of female entrepreneurs rely on business credit cards to fund their businesses.

The greater flexibility afforded by business credit cards come at a considerable price, however.

As you note, business credit cards are not subject to the consumer protections of the Credit CARD Act of 2009, which applies to personal credit cards only. There are no curbs on interest rate increases and card issuers can raise your rates retroactively, leaving you with far more card debt than you planned.

And if you’re thinking about borrowing large amounts, consider this: Let’s say you take advantage of a 0 percent APR offer lasting for 12 months and borrow $20,000 on a business credit card. This is certainly an easy way to get access to some very inexpensive start-up capital!

However, the life of an entrepreneur gets busy and you may accidentally pay the credit card bill late a couple of months in a row.

For most business credit cards, paying late will trigger default rates as high as 29.99 percent on the existing credit card balance. For the $20,000 balance in this example, that is the equivalent of about $6,000 a year — or $500 a month — in interest charges alone!

Default rates may also be triggered on business credit cards if the cardholder goes over the credit limit on another account or loan with the card issuing bank or its subsidiaries. (The exact terms vary from issuer to issuer so check with your bank before you apply.)

Of course, default rates can be easily avoided by setting up checks and balances to make sure you never miss a payment, no matter what circumstances life sends your way.

However, there are other pitfalls to using credit cards to help fund a start-up business. Here are the main drawbacks:

  • There is no reality check for credit card loans. With a small business loan or bank line of credit, a third party is evaluating how feasible the business really is. If you don’t get approved for credit, it could be a good thing! With business credit cards, in contrast, you can jump into a risky venture and not realize that it won’t fly until you’re in over your head in debt.
  • It’s easy to fall into the habit of paying just the minimum each month. This is convenient from a cash flow perspective, but with credit card interest rates typically running from 9.99 to 19.99 percent or higher, it can quickly become expensive.
  • Unlike small business loans, there is no set term limit on balances carried forward. You could end up carrying that high-interest debt for a very long time.
  • Carrying high levels of credit card debt could damage your credit score. This will make it harder to qualify for other loans with more favorable terms down the road.

Certainly, if you are aware of the pitfalls and know how to steer clear of them, business credit cards can be a useful short-term source of cash.

However, never use credit cards (personal or business) as a permanent funding source. Instead, only borrow relatively small amounts and plan on paying the balance off at the end of every month (or within a few months) to avoid accumulating high-interest credit card debt with very volatile terms.

As you continue writing your business plan, take the time to apply for other funding sources so you start your business on a solid foundation. It may take more work to get other lines of credit; but in the long run, you’ll be happy you did.