Credit cards are a major source of funds for many small business owners. These entrepreneurs often turn to using their cards in hard economic times, with the hopes that they can pay their debt off when sales increase. However, a reliance on credit cards can prove to be detrimental to the long-term health of a small business. Some entrepreneurs have even gone bust just because they were unable to manage the amount of their credit card debt. Why should you avoid using your credit card to fund your business?
1. Credit cards make it harder for businesses to survive lean times.
One of the major reasons to avoid relying on your credit card is the fact that carrying debt will put a real strain on your business cash flow. If you're able to avoid carrying a balance on your cards, you might avoid this problem, but many start-ups are in constant need of cash, which makes it more likely that you'll incur serious debt. If you run into slow sales periods, your narrow cash flow margin may become consumed by the minimum monthly balance of your cards.
2. Your card may restrict your access to funding.
If you've been unable to secure traditional small business funding from a financial institution, you may be tempted to use your credit card cash advance option as a source of funding. However, you'll be limited by the maximum limit on your card, as well as any other cash advance limits on your account. In addition, the additional fee that is involved with using the cash advance option may negate the benefits of fast cash from the card.
3. Credit debt increases the risk of start-up failure.
The likelihood that your business will fail increases when you accrue credit card debt. While many cards feature low or no interest introduction promotions, these same cards may increase the interest rate by two or three times when the promotional period ends. This sudden increase in interest charges often causes the minimum monthly payment to put a strain on the business's finances. Instead of seeking relief from credit cards, an entrepreneur would do better to line up a group of firm investors who will be involved in the company from the beginning.
Entrepreneurs already face many obstacles to long-term business success. By avoiding these common credit card mistakes, you increase the possibility that your small business will survive and even thrive, no matter the market.