One of the many concerns of startup entrepreneurs is where to get capital for starting their business. Should they apply for a loan from a bank or lending institution? Or should they simply use their credit cards?
Bank financing may turn out cheaper than credit cards, but credit cards are much easier to avail of than bank financing. It really depends on many factors:
1. Can you get bank financing? You must be able to convince the bank that your business will make money. More importantly, that you can repay the loan. If you are not likely to get bank financing, then credit cards can be your option.
2. Do you have collateral? Banks need collateral for your loans — even those guaranteed by the Small Business Administration. Credit cards, of course, do not need collateral before you can borrow. If you don’t have collateral, then credit cards are the way to go.
3. Do you have good credit history? If you already have credit card, then you have access to money, even if you presently don’t have good credit history. With bank loans, you need to prove that you have the right character – and that means you have proven to honor your debts and pay them on time.
4. Have you prepared a business plan? Banks require a business plan; credit cards do not.
5. Can the amount you need be covered by your credit card balance? If you need a small amount then credit card may be a faster and easier way to get capital
6. How much do you need? If you need $200,000 then bank financing would be the way to go. But if you only need $5,000 (and you don’t have the 6Cs that banks need then you are better off with credit card)
7. What is the type of your business? Banks hardly give loans to home businesses, and still view Internet-based businesses as high risk. If you are planning to start these types of businesses, then you are better off with credit card.
Banks evaluate your credit worthiness and risk levels of your business. They can be cheap, but it is harder. Credit cards on the other hand are easy to get, but they are an expensive source of funds.