When I work with individuals who are starting up their own business (even their own side business), I always mention a lesser known trick for getting initial financing. Hint: it’s a credit card. That’s right, you don’t need to figure out how to raise money or pester family/friends for start-up capital. You can create a new credit profile for your business and use it for initial costs, usually with little to no interest for a period of time. Most startups, despite the seemingly constant online discussion about venture funding, funding rounds, buyouts, etc., have to figure out self-funding before they ever get to that point. These types of capital raising activities will never pan out if you can’t prove your idea and see some success on our own. Even service-related businesses (as opposed to product businesses) that have few start-up costs should go through the process of building company credit because it will come in handy later down the road. Here are some tips for making it happen.
First things first, get a card
Find a credit card that will use your business tax identification number rather than your social security number. For instance, Chase offers Chase Ink Cards and American Express offers a few different small business cards.*
If you don’t have a Tax ID for your business, it takes about 3 minutes on the IRS website. You can get one for any type of business — sole proprietorship on up to C-Corp.
The goal here is for the company to create a credit profile for your business. This keeps the credit line from being reported on your personal credit report. A super-charged benefit of going this route is that credit card companies are excited about attracting small businesses to their platforms and offer fairly long initial periods of no-interest financing (6-12 months). Plus, they generally have point incentives and bonuses which can be redeemed for cash, statement credits, or travel. You don’t even have to have a business revenue minimum to be considered, and higher credit limits are usually offered to businesses as compared to individuals.
It’s definitely worth shopping around — there are many companies offering this service. Just make sure they post the account to your business credit profile, not your personal credit profile. If in doubt, ask the company.
The business credit history will be tremendously valuable if you want to access other funding or small business lending options down the road. Just like you need to build your own personal credit history, a business credit history is also important.
Use The Card to Simplify Bookkeeping
Come tax time, you’ll be glad you had a separate card for business expenses. It’s a neat and tidy record of most everything you need to report on your taxes for expenses. You can provide this to your accountant or use it to backup your receipt records. (Yes, it’s a good idea to keep business receipts).
Many credit card companies also provide year-end reports and integration with popular bookkeeping software like Quickbooks.
Why can’t I just get a loan?
You can, it would just have to be a personal loan or line of credit, rather than one that builds your business credit. Most banks (including those that offer Small Business Administration loans) will not lend to small businesses unless you have two-years progressive growth in income. Thus, you need to be around a while as a business before you can rely on this kind of funding. Plus interest rates for these types of loans are relatively high, compared to 6-12 months of zero interest.
What’s the downside?
If you’re not up and generating income to pay off the debt within 6-12 months (the zero interest bonus window) you will incur higher interest rates than if you got the personal line of credit. So make sure you have a plan to get revenues so that you can pay off the balance. Don’t get the credit card so early in your startup process that it will take several months to start generating revenue. You want to make sure you can realistically pay off the balance.
Business credit cards also aren’t covered by the latest and greatest consumer protection laws. So you’ll have to be extra diligent to use the credit wisely, pay attention to fine print, and monitor the interest rates and terms. This also isn’t the time to rack up huge, unnecessary debts. Stay lean and make purchases that will help you grow your business. The card is an opportunity to finance business expenses for which you might otherwise have used cash. You want to use it as a tool to open up your cash flow for other purposes, i.e. living expenses, business purchases that can’t be made on a credit card, etc.
Can I finance my living expenses on this card?
I wouldn’t. Definitely limit it’s use to business-related expenses (i.e. those that would qualify as a business deduction for taxes). Commingling these expenses is frowned upon by the credit card companies, and can create tax problems for you if you were in an audit and didn’t keep good records.
It’s better to make a plan prior to starting your business to finance your living costs through existing cash flows, like a current job, or through savings.
In short, a business credit card is a great way to find short-term initial financing and create a credit profile for your business. If you’re already a points wizard, finding the right business credit card should be easy for you. If not, definitely do your research and carefully read the fine print. And good luck to you as you start your business!
*I’m in no way affiliated with any of these credit card companies
