Using Your Credit Card To Finance Your Business

Is it Possible to finance a new venture with credit cards? If so, what is the best way to do it?

First, the use of personal credit cards can be a very risky means of financing business operations. Master card and Visa card weren't designed for this purpose. However, with some creative planning and both eyes open to the costs involved, personal credit cards can temporarily fill the gap between raising start-up capital and successfully ramping up the company to positive cash flow. Second, the use of credit cards should be replaced as soon as possible by more traditional bank financing and/or leasing arrangements, once the firm has reached the break-even point and monthly sales receipts can cover normal COGS (cost of goods sold) and overhead expenses.

Credit Cards For Small Businesses: Strategies

There are two basic categories where credit cards could be used for the emerging small business as part of a larger financial plan. The first category is for asset acquisition, when the firm needs to secure telephones, a fax machine, a copier, PCs, printers, mobile phones, scanners, and any other unique equipment and devices to execute the business operations. Virtually every item here can be had for little or no money down and relatively small (and manageable) monthly payments spread out over time (normally 24 to 60 months). Large office-supply stores and outlets typically offer special payment terms for their own credit cards and personal credit cards. 

The key rationale in this strategy is that the business owner is weighing the current utilization of the equipment and the present value of tangible productivity gains against anticipated future sales. Projected revenues are coming in perhaps three fiscal quarters, so even at a 15% annual credit rate (1.25% monthly), six to nine months of carrying a balance will only cost the entrepreneur between 7.5 and 10% in addition to the sticker price for these assets acquired. Paying back just the fully amortized minimum due over 24 to 60 months would add anywhere from 40 to 75% to the final cost, but the plan is to pay these balances off with the first few rounds of revenue. 

The second category for credit card use is working capital, or cash-flow management. For example, when COGS are charged to a credit card, the sponsoring bank may extend a 30-day grace period until the principal balance is due. The firm may be able to synchronize the account receivable from the buyer to match that 30-day time period, so the business can pay the balance at or close to that due date. 

Another strategy is to carry an outstanding COGS charge balance for a completed invoice for the 30 to 90 days until the buyer pays. Making the minimum payment due during that time means the total cost to carry that receivable will only be 3.75 to 5% until the principal can be paid in full. And the firm may also be able to build that percentage carrying cost into the company's pricing and gross profit margin. 

How Can You Use Your Credit Cards

The firm makes the payment on COGS with credit card No. 1, then pays the balance in full 30 days later with credit card No. 2 and avoids any interest charges. The firm then pays that carried-forward balance in full 30 days later with credit card No. 3 and has gained 60 days total time for the buyer to pay the invoice. The ultimate goal is to have access to cash to acquire needed assets now and to pay bills on time, but remember to view the credit cards as a temporary measure to get the firm out to the point of consistent revenue. Once the company's sales stabilize into regular monthly receipts, the entrepreneur should secure traditional loans for assets and a line of credit for working capital through a commercial