New businesses are at a significant disadvantage when it comes to financial resources. The cost of starting your company combined with few paying customers puts a huge strain on your business. Your may be considering obtaining a credit card for your startup. It could be a good idea if you need money right away. However, there are some downsides to using a credit card as well. Let’s go into some more detail.
How Much is Your Credit Balance?
Having a credit card is not going to do you any good if you don’t have a large enough balance. The problem with being a new business is that the company has no credit history. No creditor is going to extend a large line of credit to a new company. New business owners should avoid applying for a credit card using their personal credit score. Failure to pay down your credit card debt could ruin your credit record and impede you from financing a car, mortgaging a home, taking out a personal loan or even getting a contract mobile phone.
Use a Business Credit Card to Establish a Credit History
This implies that you may want to use a credit card with a small balance to establish that credit history. Having a separate credit account for your business can also make it easier to fight an audit should the taxman want to know about your business activities. Good record keeping is essential especially when you are running a smaller business that is just starting up, and putting all your purchases on a credit card means you can download a report of all your spending into your accounting tool of choice for easier reconciliation.
The Right Card Could Impress Clients
You may even decide that a credit card says something about your business. Clients may be won over by your ability to splurge for fancy dinners and purchase ringside seats for the heavyweight bout. The ability to establish a relationship with your client could be impacted if you do not have the money to woo them if corporate hospitality is commonplace in your industry. Having a line of credit handy allows you to impress the people who will be providing the revenue your company needs to grow in the future.
Do You Have Other Alternatives at the Moment
It may be worth it to wait before your company gets a credit card. This new business may be able to find financing from someone else. Getting a loan from a family member may give the business the money it needs without killing your credit profile should the company not produce. Consider using your own money until the business shows some signs of stability. Angel investors and services like Kickstarter also provide access to funds that you may prefer as opposed to relying on a credit card.
Conclusion
Lining up financing can be tricky for any company that is just starting up. Having the ability to wine and dine clients can be a good way to establish key relationships. However, you need to make sure that you can pay off your credit card to avoid ruining your credit score. Take your time to weigh all the consequences that may arise from having a line of credit before your company may be able to afford it.
About the Author
Andy is co-founder of FinanceChoices.co.uk, a startup that compares and reviews financial products in the UK. Follow @financechoices for more.
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