There comes a time in the life of any small-business owner when he or she poses the question: Can I use credit in a smarter way without getting my self into too much debt? The basic answer to that is: Yes, by getting a business credit card.
The first three years of a business’s life are the most crucial. During this time, the organization owner must carefully budget company expenses and allow themselves a small monthly stipend.
The Small Business Administration (SBA) in the United States warns that the majority of businesses fail due to the fact that they were undercapitalized from the get-go. In other words, the Founder/s did not acknowledge how much they would actually require to start the company and operate it until sales started occurring. In addition, in some cases, and this is the one I see more often, the Founder/s starts to make sales but leaves it too late to approach external investors and still has to shut down because of lack of cash.
This problem/statistic is not limited to US Startups. 90% of all companies will fail within the first 5-10 years of their life.
The do’s and don’ts of paying for startup expenses with a personal or business credit card
When the bank balances are low, startup founders not surprisingly rely heavily on company credit cards to assist them over those rough periods. Sadly, in using a business credit card, some startup founders try to deny reality and max out the balance and then stop paying the minimum monthly payments, resulting in substantial additional interest, and often, an entry into the company’s credit bureau file which then comes back to haunt them.
That’s still preferable, however, to the alternative. If the Founder defaults on a business credit card they are endangering the business. If they use their personal credit card to pay business expenses, they not only distort the books of the company and potentially their own economic interests but if they default, that adversely affects their personal credit standing, with all of the resultant knock-on effects that can sometimes be felt for years afterwards.
Which US Banks Are Startup Friendly?
This research by Kruze Consulting lists the most Startup friendly banks in the USA.
What About The Rest Of The World?
For startups that are not in the USA, and that is the majority of all startups, I suggest you read this post that lists Startup friendly banks globally, including some of the ones covered by the story above.
Takeaways
If Founders can obtain a company credit card for the Startup, they should use that judiciously. The best way to use it would be for monthly expenses that are say subscription-based, or recurring, such as utilities and the software tool stack. Other than that, if they don’t have enough cash to run the company for at least 12 months, or are 100% certain they can secure any shortfall from friends and family, they probably should not leave their job and start the company in the first place.
About The Author
James Spurway is an Angel Investor, Mentor, Advisor, Speaker, former Commercial Pilot, and Author who specialises in raising debt and equity capital. He strives to model diversity, equity, and inclusion in the founders he agrees to invest and work with. He has paused his angel investing activity to focus on raising his first US$ 50M venture capital fund, which will invest in startups that can accelerate the achievement of net zero emissions. James spent the past 33 years living in Hong Kong, Vietnam, Germany, Switzerland, Monaco, the USA, Thailand, the Philippines, Singapore, and Australia, his country of birth. In that time, he started 10 businesses, exited from seven, shut down two, and kept one. He has invested in a total of 50 startups since 2001 and had six successful exits.