Elaine Pofeldt is a journalist whose articles on entrepreneurship and careers have appeared in Fortune, Working Mother, Money and many other publications. She is a former senior editor at Fortune Small Business magazine and an entrepreneur herself, as co-founder of 200kfreelancer.com, a website for independent professionals. She writes “Your Business Credit,” a weekly column about small business and credit, for CreditCards.com.
Dear Your Business Credit,
I am about to take a new business venture and I swore I would not get a credit card, but it is sounding good right now to be able to get my business going faster. Would it be good to wait and see if it will be a success to get a credit card? — Kathryn
Congratulations on starting your new business venture. That takes courage and commitment, and with the economy getting stronger, it’s a good time to do so.
I see no harm in getting a credit card if you are launching the business with enough startup money and you don’t borrow excessively. A credit card can be a handy tool to help you extend your cash in the short term and build your business’s credit, if you pay your bill on time. It can also help you save time by enabling you to automate business expenses, such as software license purchases, and to keep track of expenses, so you’re not digging through endless receipts at tax time.
That said, I would not advise using a credit card in lieu of saving enough startup financing. That can lead to charging too many purchases to the card. Even if you opt for a card aimed at small businesses, you will likely be required to sign a personal guarantee for the debt. That means that if the business fails, you could be paying down the debt for years afterward. And being undercapitalized at the outset is a common contributor to business failure.
So how much startup money do you need to make sure your business has a good shot at survival and you don’t end up using your credit card for constant, emergency cash infusions? There’s no hard and fast rule, because the initial costs to launch a business can range from a few hundred dollars for a small, home-based operation to hundreds of thousands of dollars for a well-known franchise. In general, you should give yourself enough runway to build a steady list of clients and healthy cash flow, which often takes several months or more. If you have not written a business plan and figured out what the likely revenue from the business will be over the first year or two, consider getting help from your local Small Business Development Center.
You also need to make sure you can cover living expenses during your startup period.
A Gallup poll found most entrepreneurs spend at least two years running a new business before they can depend on it as their main income source. Only 38 percent of owners of businesses that have been around for one year or fewer can replace their salary from a traditional job in a startup. Among those owning businesses for one year or less, 54 percent get their main income from another job. If you have a job now, working on your business at nights or on weekends until it brings in a steady income will reduce the amount you need to borrow on credit cards.
Assuming you are well-capitalized and can afford to buy groceries, pay the rent or mortgage and keep the lights on at home during your startup period, then by all means, shop around for the best credit card to suit your needs. Good luck with your new business!
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