When cash is tight, many new business owners end up turning to their credit cards to help pay the bills, even though they know it’s a risky move.
According to a 2012 survey of small businesses from the National Small Business Association, 31 percent of respondents said they used a credit card in the past year to help finance business operations.
While many business owners use credit cards for financing, they typically don’t like this approach.
In the same survey, respondents rated credit cards as the second worst source of business financing. This is partly because if a business owner has a slow period and can’t pay off the credit cards, the cards will charge a high interest rate and the owner’s personal credit rating could take a hit.
However, Greg Starup, a vice president at the Coastal Community Bank in Everett, doesn’t think this is always a terrible approach.
Many new startup businesses don’t have much access to capital, so the business owners need to use their personal resources — savings, 401(k) balances and credit cards — to get started.
This is often seen as more desirable than taking on partners and losing control of the business or borrowing money from family members.
Once a business shows it can make a profit, it will then have access to more sources of financing, like bank loans or loans from the Small Business Association.
If you’re going to use your credit card to launch a business, you definitely aren’t alone. Just be sure to keep the risks of this approach in mind.
Source: heraldnet.com. Photo source: rudebaguette.com.
Editorial Note: Opinions expressed here are the author's alone, not those of any bank, credit card issuer, airline or hotel chain, and have not been reviewed, approved or otherwise endorsed by any of these entities.