Posted in Entrepreneurial Funding Blog Posts

Using Credit Cards as a Funding Source

Since the dawn of credit card or having the ability to “charge” an account, consumers have flocked to the idea of buy now and pay later. “In the 1800s, during the westward expansion, merchants use credit coins and charge plates to extend credit to local farmers and ranchers, allowing them to forgo paying their bills until they harvested their crops or sold their cattle.” “In 1958 major banks launched revolving credit, which allowed cardholders to carry their monthly balance forward for a nominal finance charge.” (MacDonald & Tompkins, 2017) Thus began amass influx of consumers and entrepreneurs owing more and more debt. So I have to ask, should credit cards be the best option for a small business? What should owners use and not use them for?

I recently had to work on an assignment where it required me to look at the cash management of my business several different ways regarding a line of credit. A line of credit operates similarly to a credit card. The repayment structure and flexibility are almost identical. The credit owner can request a certain amount, only pay interest on the amount they spend, and either make a full payment or make the minimum payments toward the balance. Additionally, credit cards also operate on a 30-day pay, so an owner has until the end of the month to pay. Thus allowing the owner enough to collect their account receivables to pay the bill or operate off of the retained cash but only paying the minimum.

In the Entrepreneurial Finance – Third Edition: Finance and Business Strategies for the Serious Entrepreneur, Steven Rogers and Roza Makonnen stated, “Combined personal and business credit cards are the most common source for business loans.” Even after the financial crisis of 2008, small businesses continue to use credit cards to fund their business expenses. One would think that small businesses would begin to shy away from relying so heavily on their credit to pay expenses but when customers and other businesses are late with account receivables payments, how are they supposed to survive in the interim?

Funding Circle, a direct small business investment site states, “A credit card is a good fit for handling small, ongoing working capital expenses, but if you need to make a big one-time investment to finance a long-term plan, you’re out of luck.” (FundingCircle.com) Small ongoing expenses being, office supplies, travel engagements, membership fees, or small emergency expenditures. On the contrary Funding Circle states, “Larger or more investment-oriented spending like new office equipment, new real estate, or bulk purchases of manufacturing supplies are usually better suited to a term business loan. This is because spending larger amounts on a card ties up your revolving credit load (which also damages your credit score) and comes with greater interest costs — both of which hurt your bottom line.” (FundingCircle.com)

In my opinion, credit cards should only be used for emergency situations or much like what Funding Circle suggested, “small expenditures only.” Mainly because credit cards tend to higher interest rates and if you are unsure about being able to pay the full balance each month; it would not be wise to use for any larger expense because, in the long run, it would cost you a lot more than what the purchase was actually worth. Nevertheless, if you are reluctant to obtain a small business loan or a line of credit because of collateral or personal credit issues, and still prefer to the go the credit route, be sure to shop around for the best annual percentage rate (APR).

Sources:

MacDonald, J. & Tompkins, T. (2017, July 11th) The History of Credit Cards, Credit Cards.com Retrieved via https://www.creditcards.com/credit-card-news/history-of-credit-cards.php

Roger, S. & Makonnen, R. E. (2014) Entrepreneurial Finance – Third Edition: Finance and Business Strategies for the Serious Entrepreneur [Kindle Edition]. McGraw-Hill Education & Amazon Digital Services LLC

Funding Circle (N.D.). Fund Your Business With Credit Cards? 3 Reasons To Consider. Retrieved from https://www.fundingcircle.com/us/resources/3-reasons-business-creditcards/

6 thoughts on “Using Credit Cards as a Funding Source

  1. Hi Tosh,
    Funding a business with credit cards is a scary thought. I think it would or should be your last thought when needing any kind of money for a business. Interest rates are high and you can get maxed out quick. Then what are you going to do?
    If it will be paid off at the end of the month guaranteed then it can be a useful tool. Keep it as a tool and don’t fall into the temptation of using it all the time and letting the balance build up.
    Good job explaining this!
    Thanks
    Mary

  2. Hi Tosh,
    It is surprising how many businesses are still using credit cards to fund businesses. https://www.creditkarma.com/creditcards/explore?categoryID=13&pgsz=0&pubKey=RFSVDJ8NOUC11YT1
    Here is a link to business credit cards and their interest rates are frightening. I can see why someone who has a personal credit card with a lower interest rate might use that in a pinch or if they can pay it back monthly. I have an old credit card and the interest is only 9.9% which is less than all the business cards in the link. It may not have all the “perks” but I’m paying less for money borrowed when necessary.
    Cece

  3. Tosh,

    I totally agree with you about credit cards, that it is best not to use unless of emergencies or small purchases that are easy to pay off. I plan to use a credit card for small purchases, and pay off everything month, but if it is a tight month I could just pay the minimum for that time and then pay the full amount the next month when I get the money for it. So it gives me that option to push off payment for a little bit. I think small loans might be a better way to go for bigger purchases.

    Thanks,
    Mackensie

  4. I think the credit cards play into a founder trying to keep control of the company themselves and instead of sharing the wealth of the company with a partner they accumulate more debt. It is best practice to use 30% or less of the credit card amount to keep your credit score down.

  5. Credit cards can be your best friend or your enemy ..lol as you mentioned it all depends on how you use it. And I agree – since the interest rates are pretty high – emergencies are the best and only time I would recommend them. Great info!

  6. Hi Tosh,
    During this class, I typically thought of debt as more traditional bank loans – but you’re absolutely correct that credit cards can also be used. One reason I like the idea of a credit card is that it is a lot quicker than taking out a new bank loan and having to explain your reasoning!

    Great article,
    Austin

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