The Benefits of Credit Card Funding

By Odysseas Papadimitriou

Reposted from Mashable

Thinking of using your credit card to finance your startup? For some entrepreneurs, it’s the only way to get their new business off the ground. Still, it comes with plenty of risk.

The Benefits of Credit Card Funding

• The ability to retain maximum equity:  People willing to take the risks associated with launching a startup generally believe that they have a potentially very lucrative idea on their hands. The further you can take your company without outside help, the more of your company you can keep for yourself and the less oversight you’ll have to deal with.

• 0% offers:  The ubiquity of low interest rates has made it common practice for banks to offer extremely attractive packages. The ability to escape interest for more than a year on either upcoming purchases or funding expenses already incurred would certainly help your company’s bottom line. The best offer currently available is the No Balance Transfer Fee Slate Card from Chase, which offers 0% on purchases and balance transfers for 15 months and does not charge a balance transfer fee (most cards charge 3%).

• Lack of collateral:  If you go to a bank and ask for a business loan or a business line of credit, they will want collateral.  If you want to bring on investors, they’ll want equity.  Credit cards, on the other hand, are unsecured.

The Cons of Credit Card Funding

• No separation between business and personal:  When you use a credit card to fund a business venture, the distinction between your business and personal finances largely disappears.  This is important for three reasons: 

1. It presents the possibility for personal credit score damage: Startups are inherently risky, and when you use a credit card to fund one, you are gambling with your personal credit score.
2. You are personally at risk for a lawsuit: If credit card debt proves to be the downfall of your company, debt collectors will likely be able to come after both your company and your personal income/assets to recoup what you owe.
3. Credit cards might be unattainable:The fact that business credit card underwriting has more to do with your personal credit standing than that of your business might help you get a better credit card, but it could also have the opposite effect.  Past personal credit problems could keep you from getting a credit card that will truly help you grow your business.

• Potentially low limits: Because credit cards are unsecured, they generally provide lower spending limits than secured alternatives.  Sure, you could get up to tens of thousands of dollars to play with, but there is usually an invisible ceiling around the $50,000 mark.

• Overextension:  The potential to spend more than you can afford to pay back is not a negative unique to credit cards.  Misuse of any small business funding vehicle can put you in the hole, which is why you should handle them with extreme care.

Ultimately, regardless of the funding method you decide upon, simply throwing money at a startup does not guarantee eventual success, Papadimitriou said. “Efficient use of this money as well as a lot of hard work and a little bit of luck are also essential,” he said.

Australian Market Outlook

Even though economists are positive on the outlook of the Australian share market for the remainder of 2011, there are still some concerning factors which have kept average returns in the red over the past 11 months. The European debt crisis, which began as concerns around Greece and its debt servicing ability seem to have spread further in the European Union, with Ireland and Portugal looking increasingly unstable. Further market instability has been seen with increasing oil prices a result of political instability in the Middle East and North Africa. These factors have kept the Australian market quiet on trade and discouraged investment over the past year. Looking forward we should see some of these issues regarding EU debt ease, although not quickly, as the global economy continues to recover post GFC. China’s economic growth has continued and this has benefitted Australia’s large resource companies as strong demand for its products continues. There may be a slight dampening of such demand as the Chinese government attempts to curb inflation on the back of fast economic growth.

The first six months of 2011 has seen the share market fall short of expectations due to events and concerns beyond our shores. Even so, our economy and the businesses that operate within it continue to grow and rebuild, albeit slowly, from the repercussions of the GFC. The forecast for the Australian economy is very strong for the next couple of years. This view is underpinned by the expectation that unemployment will continue to decline and stabilise around 4-5% as more labour resources are required. This is particularly true for the mining and resource service sectors.

Australia’s terms of trade have recently been upgraded creating an income surge which will quickly flow throughout the entire economy with workers, corporations and the government all benefiting.  Recent concerns regarding US debt have also had a negative effect on the All Ordinaries. However, recent developments suggest this too is improving with retail sales and production figures up and a trillion dollars’ worth of government spending cuts agreed upon in principle by the US government.

The mood across global markets appears to be decidedly downbeat and the reality is that 2011 was always going to be a tough year. In the short term at least it appears the australian market will continue to respond to poor global conditions and fears of another GFC.  However the outlook for the Australian economy is improving and we would expect this economic strength to be reflected in the market movements hopefully toward the end of this year and into 2012.

*The advice provided is of a general nature only. Everyone's financial situation varies so please contact a financial planner at EFS on (02) 9868 3900 for a financial plan that meets your needs.

Elite Financial Solutions ABN 32 077 847 486 provides its financial planning services as an Authorised Representative of Count. ‘Count’ and Count Wealth Accountants® are the trading names of Count Financial Limited, ABN 19 001 974 625. AFS Licence Number 227232. Principal Member of the Financial Planning Association of Australia Limited.

AUSTRALIAN SHARE MARKET OUTLOOK