Personal Credit May Be the Future of Small Business Capital

Many small business owners, these days, are learning that personal credit can be a powerful tool, especially in place of larger (and harder-to-get) business loans. It helps that technology has improved business processing so that less money is required for success.

Startup founder Scott Yates did not have a line of credit for smoothing out the kinks of his small business operation when he opened his proverbial doors in Denver in 2001. Instead, this founder of MyTrafficNews.com was able to use his existing credit cards to “borrow” all that he needed to get his site up and running. $20,000 in debt, Yates built his company to the point of $250,000 revenues when he sold it to Traffic.com only 5 years later.

This is becoming more and more common these days as small business owners are turning towards credit cards to help finance their business dreams. As a matter of fact, the 2011 Year-End Economic Report from the National Small Business Association states that more than 30 percent of small businesses, last year, relied on a personal credit card in order to address their need for capital. As a matter of fact, credit cards ranked as high as third on the list for sources of capital financing only preceded by bank loans and business revenue, as you might expect.

While this statistic may be relieving for small business-owners presently struggling with capital, it is also important to note that knowing which cards to use, how to best use them, and when to use them is not easy. Xavier Epps, owner of XNE Financial Advising, for example, says that loading up on debt in the early life of your business may not be wise; borrowing just to pay bills is always dangerous:

The owner may need to take a step back, look at the overall operations of a business and consider restructuring, if necessary, to get the business close to a break-even before utilizing credit card financing for purchases.

Of course, as Yates will attest, there are times when credit card financing makes the most sense. This is especially true of serial entrepreneurs like him who have found creative and persistent ways to invest in various online projects. He says:

It takes a lot of time to raise money from investors. It doesn’t take that much time to fill out a credit card application.

He will also confess, however, that revolving credit card statements forced him to get hyperfocused on reaching his cash flow goals in order to keep current on the payments.

If you are considering credit cards for your business’ capital needs, Rohit Arora, CEO of Biz2Credit, a New York City-based online loan brokerage firm, says a business credit card may be better in the long run. First of all, when you use a business card it will not affect your personal credit (unless you default) which means the risks you take on your business will not affect your ability to get a home loan or an auto loan.

Of course, if your entrepreneurial risks pay off, you could always use your business credit to finance other investments too. Arora knows a thing or two about using personal credit for business expenses as the Biz2Credit Small Business Lending Index shows that the percentage ratio of big bank approval for small business to personal credit is approximately 11:47.

There are several other reasons a business credit card may be easier or better to use than a personal credit card. For example, when you have a credit card assigned only to business expenses it is very easy to track spending. This is not only good for your bottom line but will come in quite handy around tax season. You can also deduct the interest from your business credit card on your taxes.

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