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Despite the Folklore, Financing your Startup with Small Business Credit Cards is Insanely Stupid

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Are you looking for startup funding that won’t cripple you with debt?  Try our free Funding Recommendation Engine.  Or go here for more information on small business credit cards.

Heard the story about a small business or startup with a down-on-his-luck entrepreneur with no money getting a series of credit cards and using it to finance their business and becoming wealthy and successful.  These are the stories of business folklore and mythology — An entrepreneur against-all-odds takes giant risks and magnificently succeeds.

The problem is that financing your business’ startup expenses with credit cards and levering up your business on high interest cards as detailed in these stories is colossally stupid.  As many on the ChubbyBrain team formerly worked in the credit card industry, we can say this having seen the results.

Yes you hear about the times this works (rare but they make for great, media-friendly stories), but more often than not, this load up on debt with my credit card to finance my business ends miserably.  In those cases where the story doesn’t have a happy ending, you don’t hear about the crippling financial burden it leaves a crushed entrepreneur with.  Unlike startup failure post-mortems which some brave entrepreneurs are willing to share, entrepreneurs saddled with what is often a lifetime of debt are too busy repairing their finances (and likely other parts of their life), embarrassed or some combination of the two to have time to tell the world about it.

The story the media loves generally goes like this:

  1. Small business / startup owner gets one credit card and maxes it out to buy products, inventory, servers, etc
  2. As it comes time to pay that small business credit card off, savvy entrepreneur gets a 0% balance transfer offer and so rolls over the balance from card 1 to card 2 and racks up more charges in the interim
  3. Depending on the dramatic effect the storyteller is going for, the small business repeats this again and again and ultimately ends up with somewhere between 7 and 10 cards and tens of thousands of dollars of debt
  4. But finally, the entrepreneur gods smile down and they become wildly successful and have a nice chuckle about how they were on the verge of bankruptcy and used credit cards and ultimately made it

This is a great story. It makes us feel good to hear such tales.

These are also terrible examples to follow. For every leveraged entrepreneur whose story ends with great success, there are many many more that haven’t done well using credit cards. By not doing well, it may mean a non-successful business and a pile of debt or at an extreme, ending in bankruptcy.

Small business credit cards are not intended to be used this way. The credit card companies don’t want you to be using their credit cards this way.   As one senior small business credit card exec told us, “We don’t want to take equity risk in your company without equity upside”.   And as their name implies, they are credit card companies, not equity card companies.

And you as a small business, startup entrepreneur should not do this either despite the potential chance of going down in business lore as a swashbuckling, risk-taker.  This type of entrepreneurial bravado is ultimately reckless.

Small business credit cards are generally expensive forms of debt and use them with caution. You are almost always personally liable and so they can be hazardous to your financial health and your dreams if not used properly.  Startups are risky enough without the added risks of loading up on leverage.

Of course, this doesn’t mean that small business credit cards should not be used in your startup business or that small business credit card companies are evil.  There are good reasons to use credit cards for your business.  And if you’re in the market for a small business credit card, here is our comparison of two cash back cards – AmEx’s SimplyCash vs. Chase Ink.

Before you seriously consider loading up on credit card debt for your business, try our free Funding Recommendation Engine and let our algorithm suggest VCs, angels and government grant programs that may be a fit with your business.

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