In a perfect world, you would have made the decision to create your startup last year. You’d have taken on a side gig, in addition to your full-time job, to help build up a sizable savings account to help fund your first year or two of entrepreneurship. You’d have spent what little free time you had putting together a business plan and researching VCs. And in a perfect world, everything comes together and you create a successful startup with zero debt. In a perfect world.
In the real world, the choice to go it alone might have been spontaneous or a choice you made because your job hunt was going nowhere. You might not have had the option to save up a year’s worth of income to float you through while you got your company off the ground. What’s more, in the real world, you have student loans, utility bills, etc. If you’re really serious about starting up your own company, dealing with debt is inevitable. It is also a good thing.
Wait, what? Yes. We just told you that building up some debt in the name of your business is a good thing.
The Right Kind of Debt
First, let’s be clear: we aren’t talking about taking out a five-figure small business loan that buries you in debt for years. We’re talking about smaller amounts of debt that you can pay off pretty quickly once you start making sales. For this type of debt, you’ll need to use credit cards.
Finding the Right Card
Finding the right credit cards for your business might take some time. You’ll want to read the reviews of what’s available. Not every creditor is willing to offer credit to a brand new venture. You’ll also want to consider the benefits associated with each card. If you’re going to be a consultant, you might want a card that lets you rack up frequent flier miles. If you need to finance inventory, you’ll probably be better off with one of the cash back credit cards that are available.
How Many Cards?
Start with one. All you need is one creditor to agree to set up a line of credit. You don’t even need the credit line to be very big. In fact, if you can’t find someone to offer your company some unsecured credit, you might want to consider opening up a secured card. Opening this first line of credit is essential for establishing your business’s credit (which should always be kept separate from your own). If you use this card responsibly for the first six months of starting up your company, you will likely be swimming in credit offers to help you finance your larger expenses.
How to Use Credit Cards to Finance Your Business
This is going to depend quite a bit on the type of business you’re trying to build. For the most part, however, concentrate on the most important purchases that you know you’ll be able to pay off within a few months: a new business-dedicated laptop. Software. A desk. Pay each purchase off in full before moving on to the next. You can worry about stocking up on inventory after you’ve built buzz for your company and researched vendors thoroughly. By then you should have access to all of the credit you’ll need.
Why This Plan Works
As we’ve previously stated, using credit cards to finance the initial stages of your startup is the best way to build your company’s credit history and score. The better your company’s credit, the less likely you’ll have to dip into your own money to get things moving–which is something you really want to avoid. Using credit keeps your personal and professional expenses separate. This makes your taxes and accounting much simpler and gives you legal protections if something goes wrong.
Remember: go slowly. Don’t max out your credit lines as soon as you acquire them. You need to use these credit cards responsibly so that later, when you need that big business loan to help your company grow, you’ll be guaranteed approval.
