It’s the stuff of entrepreneurial legend – wildly successful businesses that started with a great idea … and a credit card.
Just look at steely-nerved entrepreneurs like Charles Huang, who maxed out his credit cards to finance Harmonix, the company that went on to produce the highest-grossing game in U.S. history, Guitar Hero III: Legends of Rock. The same thing happened with Sergey Brin and Larry Page, who used their plastic to fund the early days of Google. Even Hollywood gets involved – famed director Kevin Smith financed his first film, Clerks, entirely with credit cards.
When Credit Cards Make Sense
There are certain times and situations where it makes sense for credit cards to be part of a larger financial plan:
Asset acquisition – Large office-supply stores and outlets typically offer special payment terms for their own credit cards as well as personal credit cards. That makes it a smart choice when your business needs telephones, fax machines, copiers and PCs. Even at a 15 percent annual rate (1.25 percent monthly), six to nine months of carrying a balance will only cost you an additional 7.5 percent to 10 percent.
Cash-flow management – Carrying an outstanding balance for 30 to 90 days until the buyer pays can make sense, too. Making the minimum payment due during that time means the total cost to carry that receivable will only be 3.75 to 5 percent until the principal can be paid in full. Simply build that “carrying cost” into your pricing and gross profit margin.
Leveraging incentives – Leveraging business spending to earn frequent flier miles, hotel stays and cash or merchandise rewards can also make sense. Cash rewards earned through spending on business credit cards can help with cash flow, as long as you remember to use the cards wisely.
Proceed with Caution
While credit card financing is certainly convenient, it does come with some downside risk. Financing your venture with credit cards can have an impact on the following:
Your personal assets. To obtain a business credit card, you’ll likely be asked to personally guarantee the debts assumed by the business. If your venture then goes belly up, the creditor can come after your personal assets.
Your credit score. Maxing out your credit cards can cause your credit score to take a hit from showing too much debt or too many inquiries from potential credit grantors. Same for “card hopping,” or signing up for multiple cards to take advantage of balance transfer deals.
When It’s Time to Make the Switch…
Credit card financing can only take you so far. When it is time to explore more stable financing, business owners have a variety of options – from SBA loans and term loans to business lines of credit and equipment leasing. Of course, there are pros and cons to each, and the key is to utilize financing that responds to your needs and strengthens your operation.
For guidance on the financing options that are best for you, please visit a Nevada State Bank business center.
The information provided is presented for general informational purposes only and does not constitute tax, legal or business advice. Any views expressed in this article may not necessarily be those of Nevada State Bank, a division of ZB, N.A.