Is it a good idea to use a credit card to start a business?

By Marianne Curphey

If you are among the growing number of self-employed people in the UK, you know that starting a business is not a simple process. In addition to having a business idea and the knowledge of how to run a company, you need funds. Many startups rely on credit cards to get the business going - especially if they are unable to get a bank loan. But that seemingly easy path can quickly lead to a long road of debt if you don't manage it wisely.

According to a 2013 report by the debt charity Stepchange, self-employed people had up to four times more debt than those aren't self-employed. The report also found that the self-employed are financially worse off month-to-month, and have higher mortgages and non-mortgage debts. business-on-credit_card

"Starting a business takes much longer than anyone tells you," says Wilma Allan, founder of the Money Midwife. "You might have a much longer time without cash flow than you expected. In fact, if you really knew how long it was going to take you might not want to do it!"

Credit cards may work -- if you're careful
Simonne Gnessen, of Wise Monkey Financial Coaching, says a credit card is a viable option for short-term borrowing when you are in the startup phase of a business. "On a temporary basis ... it can be very good," Gnessen says. "But it can be dangerous because, unlike loans, credit cards don't come with a payment schedule. So you can fall into debt if you get into the habit of making minimum payments."

Money Midwife's Allan says credit cards may be an even better choice than a bank loan -- as long as you have a reasonable repayment plan in place. "If you have a credit card and you have a good credit rating and are able to get a 0% deal, then that is a fantastic offer for 15 months or so," she says. "Your bank is not going to offer you such good terms."

Just remember to keep business and personal finances separate. While a business card may seem the most obvious means of doing that, you can get the same results by using a no-fee personal card that's reserved solely for business expenses. "This is a more cost-effective option, as business cards come with fees and are not as competitive as personal credit cards," says Andrew Hagger, founder of MoneyComms.

Be aware, however, that if you do this, a business default will reflect on your personal credit record. "What you don't want to do is to get a lot of business-related borrowing on [a personal] credit card and then find that the business is not taking off as you expected," says Hagger. "If you get to that stage, then you need to make a decision as to whether it is worth carrying on with that business."

Tips for using a credit card to start a business

  • Apply now. Once you are self-employed, financial services companies will be looking for three years' worth of financial statements before they loan you money. You will be regarded as a better credit risk while you are still employed.

    If you are currently working for a company and want to start your own business, it is best to apply for a credit card while you are still employed.
  • Build a nest egg. Allan suggests building up a savings fund before you leave full-time work as well.

    "With this financial cushion, you will take away the desperation for work or for clients that you might feel if no income is coming in."

  • Create a strong business plan. No one running their own businesses should be complacent about money, according to Darren Fell, managing director of Crunch Accounting, providers of online accounting services for small businesses . Ensure you have strong financial planning and an effective business model, with a clear business goal in place, before you consider borrowing large amounts of money to start a business.
See related: Borrowing up, interest down -- but for how long?, Don't let nontraditional loans lure you to debt

Published: 22 July 2014