Credit cards have long been an entrepreneur’s secret weapon when all other forms of funding have failed to materialise (asset finance, business loans, business overdraft extensions). Many successful entrepreneurs have confessed – after the event – to getting started this way.
How it works
If you pay for something using your personal credit card and you have no outstanding balance from the previous month, then you will have an interest-free period of up to 56 days before charges are levied on your purchases. If you can pay off the amount owed when it first becomes due then you will not incur any interest charges on your purchase, effectively enabling you to buy it on free credit.
Also, several credit cards offer 0% interest and free balance transfers for the first few months – the best deal on the market currently offers 0% interest on both purchases and transfers for the first 15 months. This means that if you are on the ball, you can take advantage of the free credit and then switch the balance to another card offering 0% interest just before the offer period is up – a practice known as credit card flipping.
How much can you borrow
Up to the credit limit allowed on your card. This once might have been £5000-10,000, but credit card providers have considerably tightened their limits over the past couple of years, and a limit of between £300 and £500 is now typical for someone who has never had access to credit before. Obviously, if you have several credit cards, you could theoretically borrow up to the limit on each one.
Free, short-term credit as long as you always pay your balance in full by the due date shown on your statement or can stick to cards offering 0% credit. You will be able to buy things instantly and will not need to explain to anyone what you are buying or why.
It will cost you dear if you don’t manage to pay off the full monthly amount owed each month, or if you are not able to find another 0% credit card to switch your balance to. Credit card providers have become increasingly wise to people constantly moving balances between cards in search of free credit and so may block your application. Credit cards typically charge between 16.9 and 19.9% APR interest rate and if you do not repay the outstanding amount owed each month it will quickly mount up.
Things to consider
Some business bank accounts which are available for start-ups, offer the option of a business credit card which also provides free credit if you pay off your outstanding balance each month.
You can apply for a credit card online. Comparison sites such as MoneySuperMarket show which credit cards offer 0% interest terms and for how long.
When Ross Marshall and Andrew Harding started their online business in 2005 offering golfing holidays, YourGolftravel.com, they funded it almost entirely with personal credit cards as the bank would not lend them any money. Of the £38,000 they needed, £8000 came from personal savings and £30,000 was put on credit cards offering free credit. “We were just flipping the debt from credit card to credit card”, said Ross. “They were charging 0% interest, so I thought it was an intelligent way to fund the business.” The gamble paid off. The business now has a turnover of £28 million and employs 90 people.
Funding your business on credit cards should only be used as a temporary measure while other forms of funding are sought. It is a high-risk option, and if you don’t keep on top of it, the interest payments could quickly scupper your business – and seriously damage your personal credit rating too.
Related: 6 best sources of business finance