Raise Capital, or Use a Credit Card

A Credit Article Contributed by Mark Mcclelland

Using Credit Cards to Raise Capital

Are you considering using your personal credit cards as a means of raising capital to finance you new start-up? Or have you already done that? You've probably already heard all the stories of doom and gloom about using your personal credit to finance your business, but sometimes, as you know, there's just no other choice. As a matter of fact, it turns out that the top two most popular methods for funding new start-ups are bank loans and credit cards.

So if that's what you're doing, you're in good company. But understand this, the ratio of those who are successful in using credit cards as a source of startup capital to those who aren't is 1 in 3, and the ones who failed aren't necessarily dummies either.

And we're sure you also understand that it's not only pretty risky to use credit cards to raise capital, but that personal credit cards are for personal use, not for business use; meaning that if you used one of your personal cards to take out a cash advance to meet payroll, for example, you're in violation of the terms of your credit card agreement. 'Even so', you might ask, 'who's looking? '

Well, actually, the credit card companies are looking. As a matter of fact, they look for specific buying patterns that would typically identify purchases being made for business purposes. But it turns out that they're not looking for the reasons you might expect - to yank your personal credit cards. They're actually looking for opportunities to sell business credit cards and other services to the small business owner, rather than punish the owner for using their personal credit cards as a source of capital for the business.

The Benefits of Using Credit Cards to Raise Capital

It turns out that using credit cards as a source of capital for your new startup can have a variety of benefits. Not only does it smooth out cash flow issues that typically plague small businesses, but credit card issuers are are falling all over themselves trying to get small business owners to move away from using their personal cards by packaging all kinds of perks and bennies with their more traditional business services.

But to get the most out of those cards there are several things you should do:

1) get as many credit cards as you can before quitting your day job to start up your new business. What you want is as much flexibility as possible. You don't have to use them all, or max them all out, you just want flexibility.

2) if at all possible you should make every effort to pay the cards off monthly. This not only lightens the load, but it also will help you develop a documented history of debt management that you can in turn take to a bank to show them that you can manage your company's finances when you decide to go for that big loan.

So, by using a bit of creativity, keeping both eyes open, and paying attention to how much it's actually costing you to use your personal unsecured credit as a source of ready capital fro your business, it's possible to use your personal plastic to help cover any capital shortfalls that may arise as you company ramps up.

The Downside to Raising Capital with Credit Cards

However, just as it is with using personal credit cards for personal purchases, using personal credit cards for business purposes has it's down side. It very possible to ruin your personal credit history in order to supply the capital required for running your business. If this happens, regardless of how successful your company eventually becomes, your personal financial status will suffer for years.

And understand that if you've indeed used your card as a source of capital, for example to make good on your payroll, you're going to have a huge bill at the end of the month. Once your cards are maxxed out, and you can't pay your bills anymore, the credit card companies are going to raise your interest rates. Once your rates go up it's even less likely you'll be able to pay your bills, and ... well, you can see it could easily turn into a death spiral that puts you but a shop hop away from bankruptcy.

Use it if you have to, but use it wisely.