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If you have a great business start up idea it can be infuriating to have to either jump through hoops as part of a bank's loan application process or surrender part of your business to investors. There is an alternative financing option in credit cards, but it does come with some risk.
For small business owners, using a credit card to self finance a start up idea can often provide a much faster route to success. However, this also means that if the start up idea is bad, then it is a much quicker route to failure. By using either personal or business credit card to finance start up ideas, small business owners are able to avoid the often predatory big-money lenders who may want to take a controlling share of the business.
Financing Web Based Start Ups
Credit card financing also has an additional bonus for internet based businesses. Internet start ups cost very little to launch and because of this are of very little interest to venture capital firms who are looking for startups to invest in.
The small cost of web start ups, due mostly to dropping bandwidth costs, means that small business owners do not need a large amount of money straight away. In the past, small business owners looking to start an internet business needed around $5 million to launch their start up idea. These days, it is possible to launch a web based company for under $50,000. Financing Expert and online host of CBC's "Dragons' Den" reality show Sean Wise says, "Not many people can come up with $5 million, but anyone with good credit can get $50,000. This has dramatically shifted the power from the investors to the entrepreneurs."
If the business then becomes successful enough to incur larger costs, you will be in a much better position to pursue venture capital financing. Often venture capitalists will ask why they should be investing money in your business if you are not investing anything yourself. However, by using a personal credit card to finance your business, you can show potential investors that you have made a personal investment. There are many successful web based businesses which were launched on credit cards.
Taking A Risk
However, using your credit card for financing for your small business can be a risky business according to Steve Bangs, lead lender relations specialist for SBA. He warns that apart from the risk of becoming trapped in high interest debt, launching a small business using credit card debt can be dangerous. Bangs likens it to starting up in a vacuum.
"Banks won't approve a loan unless they see that it has a strong chance of success," says Bangs. "The downside of financing yourself with credit cards is that there is no loan officer taking a close look at and vetting the business." Sean Wise also agrees with this, saying that it is the danger of "drinking one's own kool-aid."
Bangs suggests that any entrepreneur thinking about self financing using their credit cards should invite outside services to look at their proposals. Such services are available including SBA's free business counseling group “SCORE.”
Using personal credit cards to finance a business can be very risky. However, with some creative planning and an honest, straightforward approach to all of the costs involved, credit cards can be successfully used to temporarily fill the gap between starting up the business and getting the business to a place where it has a positive cash flow.
If credit cards are used as start up financing, it is important to replace them with more traditional bank financing or leasing agreements as quickly as possible. They should only ever be a short term measure. Credit card financing is best used for emerging small businesses as part of their larger financial plan and it can cover two main areas.
Firstly, it can be used for "asset acquisition" when the company required computers, telephones, office supplies and other equipment required to get the business up and running. The second area is working capital or cash flow management. This allows the business to lay out expenses in order to complete work, which they will then earn back in the form of customer payments.
In conclusion, self financing by way of credit cards can allow for a quicker business launch while retaining full control of your company. However, there is also the added risk that if the business fails you will be personally responsible for paying off the credit card debts.