Although financing your business with credit cards is a two-edged sword – it may sounds like a good idea or a risky business financing – many people turn to credit cards to finance their business.
One major advantage why people use credit cards financing is due to the ‘right’ combination of moderately high interest rate and the amount of credit card limit with no-collateral attached.
Why people use credit cards to fund their business
No matter how risky credit cards-based business is, there are actually success stories of people using credit cards as their leverage.
Why people would use credit cards to fund the business? Most of the cases, they avoid bank loans, because they need collaterals and strict (and complex) credit application approvals.
Why people would not turn to their friend and family for borrowing money? Many says that borrowing from friends and family is more risky than using a credit cards, as it involves risking the relationship.
Real life case studies
My fellow businessman once told me that his friend start a business and seek for partnership to join the business, with a requirement that the partner should have credit cards – the higher limit, the better. Soon he formed an LLC, with 6 or 7 partners and a startup ‘investment’ value of $75,000 in credit cards fund. The last time I heard about him, his small business is doing great.
One more case – I have a relative who finance some of his businesses (Yes – he has multiple small businesses) with credit cards. Although his business involves high volume transactions with low profit margins, he insisted to use credit cards, mainly because of the point rewards – he said that, the reward itself is a ‘nice’ addition to the business’ profit.
The last case is very interesting to me – let’s dig deeper on my relative business plan.
The use of reward credit cards as your business cash flow account
The main idea of using credit cards, in my opinion, is not on the interest rates, but more on the ability to ‘borrow’ money and pay it in full before the billing date – during the grace period.
Here is the breakdown of reward credit cards business model – also an analysis of my relative’s business model:
- Apply for multiple credit cards
Opposed to the get-out-of-debt action plan, he apply for multiple credit cards with maxed-out limits. This is to fund his business supply purchases.
- Pay credit card bills on time
The main idea is not to use the credit cards for interest-yielding loan purposes, but to borrow for about a month, and repay it on time during your credit cards grace period – this is considered a no interest loan, because no interest is actually being charged if you pay the credit cards on time.
- Your loan only costs you annual fees
The only credit cards loan cost is the annual fees – some issuers even charge no annual fees.
- You get rewards
This is the best thing in using credit cards for business – you get cash backs, save on dinings, hotel rewards, and many more. With tens of thousands of dollars my relative has on credit cards, he definitely can take a nice vacation quarterly, funded by the card issuer rewards.
Stumbling stones of business credit cards funding
There are definitely risk involves in this credit card financing strategy:
- The variable due dates could cause you to forget to pay in time
Having many credit cards with different due dates every month is challanging. A late payment will occasionally happen – causing you to pay the expensive interests. But this can be handled by hiring an assistant to manage your credit cards book keeping.
- Not to use the credit cards for shopping purposes is challenging
Pleaes limit the use of reward credit cards business plan strictly to business. Use the cards for shopping will increase your risk. The temptation is huge – try to avoid doing that at all cost.
- No collateral means the risk is beyond the money you borrow
Bank loans is ‘safe’ because they usually require collaterals. If anything goes wrong, you have the safety net. Personal guarantee or anything without collateral means you risking your personal financial life, too
The key is to know your game well. I suggest you to talk to credit card consultants and those who has done this before, especially on the risks, fees, expenses and other ‘overheads’ of applying on a certain business credit cards.
Credit cards business funding