“Guitar Hero III: Legends of the Rock” recently became the highest-grossing game in U.S. history. And to think Charles Huang, the former partner of Harmonix and designer of the little plastic guitars, maxed out his credit cards to finance the company in 2007.
Same with Sergey Brin and Larry Page, who used plastic to fund Google in the mid-1990s. Mindful of their spending limits, they bought used computers and open-source software–the latter ironically contributing to their global dominance.
And yet another example of using credit cards as a means of creative business financing: the 1994 movie “Clerks.” Director Kevin Smith filmed the independent comedy for just $27,575, mainly funded by the 10 credit cards he had in his name. The movie grossed more than $3 million in theaters.
“A lot of famous businesses started in the basement using personal credit cards to get the business off the ground,” says Curtis Arnold, founder of CardRatings.com.
Using the best credit cards to finance a new business venture has risks and rewards. If it works, it’s a relatively easy way to secure funding, but if the business fails, you could find yourself in bankruptcy court with your credit in shambles.
Credit cards provide easy funding for start-up
Sam Thacker, owner of Business Finance Solutions in Austin, Tex., says that when he started in the banking business in the mid-1990s, bankers looked askance at entrepreneurs who tried to find the best credit cards to start their businesses.
“Having high credit card balances used to be a pretty big black mark on your ability to grow and build your business,” Thacker says. By the late 1990s, though, he says, “it seems like everyone was using the best credit cards they could find to finance their businesses. By 2007, it was the norm. It was part of the culture.”
It still is, Thacker says, especially since the financial crisis of 2008 made lenders tighten their credit standards so that it is now much harder to secure a small-business loan. “The biggest pro to using credit cards in this economy is availability,” he says. “If you report a high enough income and your credit score is high enough, they’ll approve you for $50,000, $75,000, even $100,000 credit card limits–which could be enough to get your business going.”
And as long as you toe the line and make at least the minimum payments on time each month, credit card issuers are usually more than happy to extend your credit limit.
Other advantages to using credit cards for financing your business:
- You can draw down what you need, when you need it. No need to have a $100,000 loan that you’re paying back with interest before you spend it, says Denise Breeson, who teaches small-business management classes at Santa Rosa Junior College in Santa Rosa, Calif.
- You can spend the money as you choose. “You don’t need to consult with anyone to be able to make a purchase,” Breeson says. If you have investors, it’s likely you will need approval from your board or your shareholders before making a purchase.
However, you’ve got to proceed with caution.
Risks of using credit card financing
You’re pretty much on your own when you’re using credit cards–especially if they are personal rather than business credit cards. And that lack of impartial oversight could lead you down a one-way road to business failure. “Credit card financing may be too easy to get for a simple business idea that’s not a real profitable business model,” Breeson says.
Also, you could be more easily tempted to spend money on items that are not necessary or not directly related to the business. Expensive “business” lunches are a prime example, Breeson says.
If you use plastic to bootstrap your business venture and run up huge balances, issuers might become nervous about your ability to pay them off and decide to cut your credit limits. Murphy’s Law being what it is, they will likely do this at the most inopportune time.
What about credit score?
Thacker says maxing your credit cards to fund your business will affect your credit score, though not as dramatically as you might think. “You may have a decreased credit score as a result of showing too much debt on your credit report or too many inquiries from potential credit grantors,” he says. “But if you work hard to keep your credit card balance(s) as low as possible and show on-time payment on all of them, (chances are good) that your credit score will only marginally be affected.”
If you’re going the credit card route, shop around for the best credit cards and best rates, Arnold says. As part of your financial health, keep an eye on your interest rate and take advantage of balance transfer offers with low introductory rates.