Maxing out your credit card to launch a startup can be risky; there are other ways to finance your business without incurring card debt.
Is it a good idea to max out my credit card to finance my startup?
There are better, more resourceful, ways to fund a business that do not result in credit card debt. These may include:
Dear Your Business Credit,
Some of my friends came up with the startup cash they needed by maxing out their 0 percent interest credit cards. They’ve already paid back the debt from the sales they brought in.
I am an inventor and am thinking of borrowing the money on my credit card to create a prototype and bring it to market. Do you think that’s a good idea?
I have good credit, but I don’t have much of a credit history. – Danny
We’ve all heard stories of entrepreneurs who used credit card financing and made it big. The trouble is we seldom find out about the people who maxed out their credit cards for a business that failed and are still paying back the debt years later.
I’ve gotten a number of letters here at CreditCards.com from people in that category, and they always make me wonder if there could have been a better, more resourceful way to fund the business that did not result in debt.
See related: 6 reasons entrepreneurs should get a business card
Crowdfunding: A way to avoid startup-related card debt
Since you are developing a new product, I’d consider trying to raise money from supporters on a crowdfunding site such as Kickstarter.
Many inventors ask their customers to place a pre-order on Kickstarter and then use the money they receive to pay for the manufacturing of the product.
What’s great about turning to a site like Kickstarter is that you can study other successful campaigns to see how the entrepreneurs behind them made their pitches and kept customers updated on their progress.
It can be a lot of work to create a crowdfunding campaign, but it won’t leave you with debt.
See related: Card refund tips for crowdfunding sites, scams
Other funding alternatives to avoid card debt: Investors, competitions
You might also consider looking for an investor. Many cities have a network of private investors called angels. Some of these networks hold events where you can pitch the investors your idea.
Although bringing on an investor means you will have to give up some of your equity, it will could also keep you debt free.
Entering business plan competitions can be another good way to raise funding.
I’ve come across a few startups that have entered multiple startup or pitching competitions and won enough money to fund their ideas, at least in the early stages.
Ask the business schools at your local universities if they have any on campus. Often these contests are open to the community.
Keep your day job and watch your spending
There’s another way to fund a business that’s much simpler than all of this – paying your startup costs with the salary from a day job.
That’s not always possible, especially if you have dependents, but for many people, it’s the best available option.
It’ll keep you out of debt and, unlike borrowing money, will keep your very conscious of how much you’re spending on your startup.
Sure, it would be great if you could borrow all the money you need at 0 percent interest and have a guarantee that you’d be able to pay it back.
But unless it’s a small amount of cash, you need to think hard about the possibility you will be left owing a lot of money if something goes wrong.
My recommendation is to find a way of financing your startup that will leave you debt free.
See related: Best zero interest credit cards