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Credit Card Funding for Startups: Does It Work?

Credit Card Funding for Startups: Does it Work?
Susan Guillory

Susan Guillory

Updated September 30, 2021
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Editor’s note: At Lantern, we strive to help you make financial decisions with confidence. To do this, we occasionally feature content that includes information about our partners and their products or services. We do not provide, endorse, or guarantee any third-party product, service, information or recommendations—and our opinions are our own.
When you’re looking for small business loans and financing solutions, maybe to get through a slow period or perhaps to grow your company, it’s a good idea to explore all your options. In addition to loans, lines of credit, and other financial tools, credit card funding is an option to consider. It’s easy to access, it can be used in many situations, and it can have some pretty great perks, but there are downsides, too, as well as alternatives. Credit card funding for startups can work. But it pays to know all the facts before you make a decision.

What Does Credit Card Financing Mean?

So, what exactly is credit card financing? It simply refers to using credit cards to make purchases for your business.Unlike term loans, where you get a fixed amount of cash all at once and then pay it back over a fixed period of time, credit card funding works more like a line of credit. You have access to a certain amount of credit and can make a purchase, pay it back, and then have access to the full line of credit again.Credit cards do tend to have high interest rates. But paying off your purchases before the close of a billing period may minimize the fees you have to pay.

Should a Business Owner Consider Using a Personal Credit Card to Fund Their Business?

You probably have a personal credit card, and you might have thought about using the same credit card funding for your business. But if you’re a small business owner, it’s a smart idea to have a separate credit card for business use.Why?You file taxes for your business, and you need to include business-related expenses. Having a separate card makes your accounting and tax filing easier because it helps you avoid mingling your personal and business expenses. Cards designed for businesses may also offer benefits intended to be useful to them, like travel and lodging perks and cash back for purchase at retailers like office supply stores. Of course, what’s useful to your business depends on its unique needs, and business cards don’t always have the same protections as consumer cards, so it’s important to read and understand the terms of any card you apply for.Some of the same considerations about keeping your personal finances separated from your business finances also apply to taking out personal business loans. While it’s possible to take out a personal loan for business expenses, taking out a business loan will help keep things neater and more organized.If you’re interested in getting small business funding with a credit card but not sure where to start, consider these top small business credit cards for your company.

Pros and Cons of Credit Card Funding

Credit card funding does offer many benefits, but it’s not without its drawbacks. It’s a good idea to weigh them both carefully.

Pros of Credit Card Business Funding

Credit card funding offers many benefits if you’re looking for a versatile financing option.

Potential for Rewards

There are many business credit cards that come with rewards programs. For each purchase you make, you can earn points that can be redeemed for travel, gift cards, and/or cash back. This may help offset the interest fees charged.

Credit Replenishment

Loans for business involve a lump sum you receive once in its entirety. But credit cards can be used in perpetuity, as long as you pay your balance. As long as you pay off the balance, you can draw on the card again.

May Be More Affordable Than Some Financing

Though credit cards do come with hefty interest rates, they may be cheaper forms of financing than options like merchant cash advances and alternative loans. If you don’t qualify for low-interest bank or SBA loans, business credit cards may be your next best solution.

Cons of Credit Card Business Funding

With any form of financing there are also downsides. Here are a few factors to be aware of.

Can Be Expensive if You Don’t Pay Off Your Balance

The range for average business credit card APRs was 14.22% to 22.19%, as of September 8, 2021. Those rates are no joke! Keeping a balance on your credit card means you’ll pay more and more for a purchase over time. Paying off your balance in full as soon as you can may keep your financing costs down.

May Have Other Fees

In addition to interest rates, business credit cards often carry other fees, too. You may pay a fee for a balance transfer. If you’re using it to fund your bank account with a credit card, you may be hit with bank card funding fees. Paying late may result in fees. And there may be annual fees. Read the fine print to understand all potential fees you might be charged.

May Not Provide Enough Capital

Credit cards offer access to a certain amount of credit, but you may need significantly more to start or grow your business. Your card probably won’t cover larger expenses like purchasing real estate or expensive equipment. If your needs exceed your credit limit, you may have to take out an additional loan or business line of credit

Other Startup Funding Options

Business credit card financing is far from your only option if you’re looking for capital for your business. No matter what your credit score, there’s a small business financing solution for you.

Small Business Loans

Unlike a credit card, business loans give you cold hard cash. If you can’t use a card to make a purchase, small business loans from banks, credit unions, or the SBA can get you the cash you need. Typically you need good to excellent credit to qualify.

Business Lines of Credit

You already know how a line of credit works, since that’s essentially what a credit card is. However, an actual line of credit gets you access to cash, up to your credit limit. Repay it and that full limit is available again.

Invoice Financing

If you don’t qualify for other types of financing but have receivables, consider invoice financing. You’re advanced most or all of the amount of an invoice that a client owes (minus a fee) and pay it back once the client pays the invoice.

Equipment Financing

If you’re looking to purchase equipment but don’t have good business credit, equipment financing is worth looking into. The equipment you’re purchasing, whether that’s a computer, a company vehicle, or a threshing machine, serves as your collateral, which means you may get a lower interest rate than with other types of financing.

Merchant Cash Advances

A merchant cash advance (MCA) is one of several bad credit small business loans that are easy to qualify for with any credit profile. Rather than a loan, an MCA advances you cash based on your sales numbers. You repay what you get daily or weekly from your credit and debit card transactions.

The Takeaway

If you need a tool to help you purchase items for your small business, credit card funding has a lot to offer. It’s versatile, may offer rewards, and, depending on your credit, may be more affordable than other financing options.If you want to explore all your financing options, Lantern by SoFi can help. You can get small business funding offers from multiple lenders in our network by filling out one simple form. 
Photo credit: iStock/Eva-Katalin
The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.SOLC0921181

About the Author

Susan Guillory

Susan Guillory

Susan Guillory is the president of Egg Marketing, a content marketing firm based in San Diego. She’s written several business books, and has been published on sites including Forbes, AllBusiness, and Cision. She enjoys writing about business and personal credit, financial strategies, loans, and credit cards. Follow her on Twitter @eggmarketing.
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