Q: If I use my credit card to cover my business’ startup costs, is that considered good debt or bad debt?
— L. Stokes, Via the Internet
A: The more I hear about how startups use credit cards to cover the initial costs of their business, the more I’m convinced that plastic debt has become today’s small-business financing tool. This readily available line of credit may save you time, but poor debt management can quickly put your startup in jeapordy. With careful planning, however, credit cards give entrepreneurs the chance to finance their fledgling enterprise until the dough starts rolling in.
Your startup business will probably be too new to get its “own” credit cards. In this case, you’ll have to use your personal credit card. But beware, using personal credit cards can be a very risky means of financing your business operations. Until projected revenues start coming in, carrying a six-to-eight-month balance on a 15% annual credit rate will cost an entrepreneur between 7.5% and 10% in addition to the price paid for items. It can be devastating for your startup if sales revenues don’t materialize as planned.
The key to managing a good debt strategy is to view your credit cards as a temporary measure to have access to cash. Paying your bills on time is key until your company reaches a point of consistent cash flow. Eventually, you should secure traditional loans or a line of credit through a commercial bank to acquire the assets you need for your startup.