Avoid Financing Business with Personal Credit Cards

By Rhonda Campbell

Few businesses start with enough money to cover all recurring and non-recurring expenses. To pay business start-up costs some entrepreneurs take out low interest loans from credible lenders. Other entrepreneurs secure funding from family members and friends or angel investors. However, these are not the only ways entrepreneurs raise money to pay for their companies. In fact, business owners who may not be able to get funding from these more traditional methods have been known to use their credit cards to pay for business expenses.

About Using Credit Cards to Pay Business Expenses

Although it may be tempting to view credit cards as personal finances, that simply is not the case. Money on credit cards belongs to the lender financing the cards. The money must be repaid with interest, often at high rates. Additionally, entrepreneurs who use their personal credit cards to pay business expenses can lower their personal credit rating if they don’t repay balances on time. They might also be paying higher interest rates for business purchases than they could if they had applied for and received a business loan or even had they used a business credit card.

But that’s not all. If entrepreneurs use credit cards that have adjustable interest rates, they might start out owning a certain amount after they purchase office equipment and furniture only to discover that the interest rates on their credit cards have increased, causing them to have to pay a significantly higher monthly credit card bill.

However, there are times when financing your business using low interest business credit cards may work. For example, if a business regularly experiences one to two slow sales months a year but has a strong history of generating improved sales for the remainder of the year, using business credit cards can help entrepreneurs gain access to capital on a short term basis. Entrepreneurs who choose this option should ensure that their business has been in operation for three or more years and that their company has healthy cash flows. Business owners are not encouraged to use business credit cards as a long term means of financing their companies.

Make Smart Financing Choices

Additional cautions entrepreneurs are encouraged to take when financing their companies using business credit cards include:

• Make business credit card payments on time
• Steer clear of cash advances
• Limit business credit card usage to credit cards that do not accrue interest from the time of purchase as this can lower monthly payments
• Work to generate enough business sales to no longer need to use business credit cards (make this the ultimate goal instead of getting comfortable relying on business credit cards)

The downside to financing a business with credit cards is the fact that, generally 31 days after paying for business expenses entrepreneurs must start to repay the money they borrowed using credit cards. After all, money on credit cards belongs to the lenders financing the credit cards. When it comes time to repay credit card balances you may discover that the interest rates associated with purchases are high, much higher than interest rates you might have to repay had you used more traditional forms of business financing. Furthermore, if you only make the minimum payments on credit cards it may take you several years to pay off the entire balance on the debts, which may ensure that you continue to pay high interest rates and possibly late fees and fines.

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