Is it a Good Idea to Finance Your Business with Credit Cards?

Credit cards can be a wonderful way of making a quick purchase when a deal comes up or when you want to maintain thorough records of your transactions. Sometimes a credit card slip is enough to act as a receipt for a product. A problem results when you take on credit card debt and fail to pay off the balance every month thereby destroying your personal credit worthiness and strap yourself with heavy debt.

Nearly 37% of Americans have $10,000 in unsecured debt which is namely in the form of credit cards. Items charged on the card range from groceries to big ticket items like refrigerators. The average American saves -1% of their income which indicates a society full of people with debt that they will have difficulty paying.

Let us assume that your average return on investment for a business is around 10%. That means for every $1000 you invest in your business you earn $100 annually. With an average business profit you would just about break even on a business loan but you may lose around 3-8% of value if you financed a business on a credit card. That 3-8% interest rate might make or break your budding business.

If 8 out of 10 businesses fail within the first five years there is an 80% chance you would be strapped with heavy personal debt in the form of credit cards one your business has failed. This debt will continue to accumulate interest despite the business now being something of the past. The risk and interest associated with debt is higher than would be warranted. The likelihood that your financial credit history will be destroyed for years to come is also high.

The problem with credit cards is that they are considered unsecured debt that is tied directly to your financial rating. If you fail in your payments there is a high likelihood that you will be financially ruined for some time. One strategy progressive business owner's use is to incorporate their business so that they limit the amount of personal exposure they have if the business goes bankrupt. Most small sole-proprietorships use a social security number or state issued tax I.D. number to report their earnings. There is no protection for the owner(s) under a sole proprietorship.

The best way of financing is through investors. By sharing in the potential profits and losses of the business you can protect yourself better if the business doesn't work out as planned. Furthermore enough capital may be raised to actually give the business a starting chance. Investors may give you money for your business if they honestly feel that your idea will earn them 10% or more on their money. This money is secured against the assets of the company or the intellectual ideas. The good news is that the risk and personal exposure is limited.