A business needs fund. Credit card is one of such sources. An entrepreneur is tempted to maximize his use of credit card to fund his business. Since he does not have any other way of funding his venture, credit card seems like an easy money. Just swipe and buy anything he wants.
While the use of credit card is necessary and useful at some places, excessive use of credit card for business is detrimental to an individual and his business. It may lead to bankruptcy and legal suites. Let us discuss some of the disadvantages when you fund your business needs with a credit card.
- High levels of temptation
- High Interest rates
- Lowering of credit score
- Exposure to credit card fraud
- Extremely high rate of return required
- Financial cost of default
Since it is easy money, the threshold to spend now is very low. That means you tend to buy more when you are buying with credit card than when you buy with cash. Also there is a tendency to spend more times compared to the cash which gets over in your pocket at regular intervals. More use means more debt.
In India credit card rates on a rolling balance are around 40-50%.(3-4% p.m). It would take six years to repay your amount( based on credit card company study ) if you let your outstanding amount rollover. Some credit card add previously full due amount to your card to your new card due, even if you have paid the last amount partially. It is strange but I have seen it happen. That means interest will be calculated on total amount due + partial amount. Credit card rates are high in all parts of world, much much higher than any bank loan.
If you are unable to use pay a credit card the dues on you, your credit score suffers a setback. It might take many on time repayments before it is set right. Bad credit score mean that you might be denied loans and credit for even mortgage and purchases.
Using credit card online means someone is storing it on their servers. All credit card details are prone to hacking. A recent Sony hack has revealed millions of credit card numbers to the world. While it is easy to detect such big levels of fraud, you might not even notice that your card is being misused until you receive a credit card statement. Also if you use your credit card on sites that use insecure connection over the internet , your card information may be intercepted while it travels through internet.
If you plan to use credit card as your primary source of funding for your venture, beware that it is not possible to repay the credit card balance(if rolled over) by any business returns. A business returns of over 40-50% on money invested are phenomenal and uncommon. You are set to straight losses if you use credit card for your business.
The financial costs of default is very high. Imagine when you are asked to pay total interest + bank penalties + legal costs. In business risk is a necessary evil but defaulting presents huge challenge to your capacity to raise credit in future and start any other new venture.