A range of options are available to raise funding for your startup. These include self-funding or bootstrapping, crowdfunding, taking the help of angel investors and venture capitalists, funding business with the help of incubators or accelerator programmers, loans from banks and NBFCs. However, all of these methods take time and patience. Some quick methods include selling your assets, product pre-sale and using your personal credit cards.
Many entrepreneurs have used credit cards to start their own business. Len Bosack and Sandy Lerner used personal credit cards to start Cisco Systems. Larry Page and Sergey Brin's Google was financed by credit cards to buy the necessary computers and office equipment, more specifically "a terabyte of hard disks". Similarly, filmmaker Robert Townsend financed part of Hollywood Shuffle using credit cards. Director Kevin Smith funded Clerks in part by maxing out several credit cards. Famed hedge fund manager Bruce Kovner began his career (and, later on, his firm Caxton Associates) in financial markets by borrowing from his credit card.
Since small business owners often do not have a business credit history, therefore, it is personal credit that is the quickest way to get money to fund a startup. Let us look at the pros and cons of using a credit card for funding your startup.
Quick and easy Cash flow: Since there are no procedures to comply with, it is very convenient to get easy money for running a new business, esp. for businesses with sporadic revenue.
Build your business credit: Often small business owners do not have previous business credit. Therefore, it is also an opportunity to build business credit so that they can apply for business credit cards later.
Sign-up rewards and bonuses: If you are always paying your bills, then you can substantially increase your cash flow by earning rewards and cash back benefits.
Keep equity in your startup: There is no need of bringing in outside investors when you can pay for your business expenses. So, you retain your equity.
No collateral needed: Unlike a traditional loan, where you would need collateral, credit card does not require any collateral.
Personal Liability: In case of personal credit cards, you would be solely responsible for any payments due on your credit card. If your business does not do well and you are unable to pay interest rates on time, then your credit score is negatively affected. If your business fails completely, banks have every right to sell your assets to recover the debt incurred by you.
Interest rates: Credit card interest rates are much higher than traditional loans. In case of late payment or nonpayment, the financial burden incurred will be huge
Expensive in the long run: Sometimes, it is smarter to apply for a bigger loan with a fixed interest rate. This will keep things in perspective and you can avoid paying high interest rates every month.
Low Credit Limits: Since credit limit is dependent on a number of factors such as income, your job, ITR, your credit score and credit history, it is important that you understand the limitations of using a credit card.
An alternative for Entrepreneurs with Business Credit:
For those business owners who already have a business credit history, they can opt for Business Credit Cards. These credit cards facilitate companies and employees to track down their expenses in a more hassle-free or efficient manner. Most of these credit cards offer an opportunity for companies to set a limit on the company's total expenses and the card limits for its employees. You can choose one of the best credit cards in India for your startup/business. You can check out RBL Bank’s RBL India Startup Club Platinum Credit Card, which is exclusively launched for startup owners. One of the problems with issuing business credit cards to your employees is that you would be liable for any unauthorized usage on the credit card.
Using a personal credit card for financing your startup is definitely taking a risk. Moreover, introductory 0% APR in the first year does not exist in India, hence, the advantages of funding your small business with personal credit card is not as significant as in the US or Europe. Nevertheless, if you have a high personal credit limit on your card and make your payments on time, then using credit cards in the short term is a smart idea. For getting loans approved, it usually takes time, which is not the case with credit cards. According to one study, a small business decreases its chances of long-term survival by over 2% for every $1,000 it takes on in credit card debt. Furthermore, your goal should be to generate revenue as soon as possible or use other methods to raise funding for your business.