While some businesses go to banks to get loans or turn to online funding campaigns to bankroll their business venture, credit cards have become a popular way for small business owners to fund their startup. There are some limitations, however, and some important things you should consider before using this funding method.
Is Your Credit Good Enough?
Your credit score isn't the primary determiner whether you'll secure a business credit card or not, but it is one of the most important factors. While some business credit cards are aimed at those with less than stellar credit, most aren't. Even if you qualify for a business credit card, you may not like the terms.
If you have fair or poor credit (a credit score of 550 to 640), chances are you will only qualify for cards with limited credit lines, higher annual percentage rates and high annual fees. In fact, the terms may be so restrictive, they offer little benefit.
On the other hand, if you have good to excellent credit (a credit score of 640 to 850), you may qualify for a card with an unlimited spending limit and low APR and fees.
The first step is to find out what your credit score is. Once a year, you're entitled to get your credit score for free from the major credit-reporting companies. If you've never investigated your credit score or it's been awhile, go to the Experian, TransUnion or Equifax website and submit your information.
Narrow Your Options
Once you know your score, narrow your list of options down to a few cards. Check out our information on some of the top cards available to businesses. Be sure to note the APR, terms, fees and rewards offered by the card.
Also, be sure to choose a card that provides benefits that your business will actually use. You don't need a travel rewards card, for example, if no one at your business travels.
Applying for a Business Credit Card
Before applying for a business credit card, credit card companies will verify your business to ensure it's a real entity.
Register your business with your state government and acquire a federal tax identification number. This information is vital to your application, not to mention it's vital to filing taxes and conducting business.
Business Credit Card Debt Affects Your Personal Credit
Unless your business is incorporated, your business credit card is linked to your personal credit, or the individual who provided the personal guarantee to the credit card company. If your company is in a slump and you can't pay the bill, then your personal credit score suffers. This is one of the major risks of using a business credit card to fund a startup.
Your personal credit may also decline if you amass a large amount of debt using your business credit card. A major influencer for a person's credit score is how much debt he or she has in relation to available credit.
While using a business credit card to fund your startup is an option, proceed with caution. Make sure your credit is in good shape so you can secure the best terms. Make your business official by obtaining a tax identification number and registering your company with your state government, and, finally, consider how the debt you'll be taking on will affect your personal credit score and finances.