By Meredith Wood
When you’re starting a new business, you need a lot of things—but capital is of the most significant.
Unfortunately, capital is hard to come by for most new companies. For instance, you likely won’t have enough time in business or recurring revenue to apply for a business loan, and you may not be in a position to raise venture capital.
Even to get to a point at which a lender would consider you for financing, or an investor would consider your company for a capital infusion, you need money.
So, you need a solution. A business credit card could be a great option for your startup. Here’s how to tell.
The Best Types of Business Credit Cards for Startups
Let’s start with the best types of credit cards for startups because once you understand the offerings, you’ll have a better sense of whether you’re a fit for this kind of financing.
0% Intro APR Business Credit Cards
If your personal credit score is high enough, look to qualify for a 0% introductory APR business credit card. With these kinds of business credit cards, you’ll have a finite period over which you can make purchases without accruing interest until the time is up. So, you’ll be able to buy what you need for your business up to your limit and carry a balance with no penalty.
That’s why 0% intro APR credit cards can be so helpful. You may need to make several purchases to get your business off the ground. With the introductory period, which can be up to or, in some cases, more than a year, you can strategically plan how much you’ll pay per month, and put in place a plan to get your balance down to $0.
It’s important to note, of course, that once your introductory period is up, an adjustable APR will kick in based on your creditworthiness and the market Prime Rate. Be certain to check in with a card issuer for details so you don’t end up with a balance you can’t afford—that’s the whole point of the 0% APR!
Rewards Business Credit Cards
You’ll find various rewards business credit cards on the market—some give you travel perks, others give you cash back, some others give you more flexibility with how you redeem your points. You’ll want to consider getting a rewards card in the category that helps you most. This may seem obvious, but the right rewards card can help you build your business, so choose carefully.
For instance, a cash back credit card can help you directly reinvest back into your business with statement credits. A travel rewards credit card can help you reduce spending on trips. Many rewards cards also come with welcome bonuses, which is another reason why you should study your options carefully. These bonuses could mean a big help to a company just getting off the ground.
Secured Business Credit Cards
Let’s say you really need to improve your business credit in order to acquire either of the previous card options. You can start the process by obtaining a secured business card, which typically requires that you submit a refundable deposit to the issuer in exchange for your card.
Yes, this means you’re technically often borrowing against your own money—but use your secured credit card to build up good spending habits and history, and you’ll soon qualify for an unsecured (or typical) business credit card that extends you the financing you need.
Who Should Finance a Startup with a Business Credit Card
As we mentioned in the outset, without revenue or time in business history, you’re unlike to get most business loans—and especially ones with rates you actually want to pay. It makes sense from a lender’s perspective; it’s almost impossible to evaluate a candidate’s creditworthiness and likelihood to pay back a business loan with no track record.
So, business credit cards are great alternatives in the meanwhile to help you lay the foundation of your company—maybe purchase the essential supplies you need, or stock up on inventory for the first time. If you’re going to go the route of a business credit card, understand that you’ll have to be diligent with how much you have in the bank versus how much you’re spending. Credit card interest rates can be extremely high—sometimes 25% or more.
Still, a business credit card is an immensely helpful tool to put you on the path to success. Financing your business with a credit card can also help you build your business credit score on the path to a loan.
Why Building Business Credit Is Important
Business credit is different than personal credit. In the way that a personal credit score tells the story of your personal history with debt, a business credit score does the same thing with your business’s finances. It’s evaluated on a different scale (usually up to 100 or up to 300, depending on the credit bureau), and takes into account a few different things such as the risk of your industry.
But, other than that, a business credit score comprises many of the same elements of your personal score, including your utilization ratio, bill payment, and more.
A high business credit score can open many of the same doors for your startup that a high personal credit score can open for you: financing, lower rates on credit products, higher credit lines. And, luckily, a business credit card can help you build business credit.
So, Should You Finance Your Startup with a Credit Card?
For the most part, a credit card can be an excellent tool for getting your small business startup off the ground.
Keep in mind that large expenses such as new equipment or renovations may take months or even years to pay off—which, with credit card interest rates, can be exorbitantly expensive. Make sure your plan to pay off your balance keeps this fact in mind, and consider exploring other forms of financing for big-ticket purchases.
So before you consider using your business credit card to finance your business, ask yourself these questions:
- Can I qualify for a business credit card that fulfills my goals?
- Do I have a financial plan to pay off my balance?
- Is my personal credit strong enough to qualify for a business credit card?
If you can answer yes to these foundational questions, it’s likely that you can use a business credit card to finance your startup—at least in the short-term. Eventually, you’ll upgrade to bigger and better funding options, but your credit card will remain a trusty, flexible financing tool for years to come.
Meredith Wood is the Editor-in-Chief at Fundera, an online marketplace for small business loans that matches business owners with the best funding providers for their business. Prior to Fundera, Meredith was the CCO at Funding Gates. Meredith is a resident Finance Advisor on American Express OPEN Forum and an avid business writer. Her advice consistently appears on such sites as Yahoo!, Fox Business, Amex OPEN, AllBusiness, and many more. Meredith is also the Senior Financial and B2B Correspondent for AlleyWire.
Startup stock photo by Eugenio Marongiu/Shutterstock