As great as it is to have an idea for a new company, it’s never quite as easy to figure out how to initially fund that business, especially if it won’t immediately return a profit. That goes double if you’re still in school or have student loans to repay.
The truth is, the average graduate from the class of 2016 had $37,172 in student loan debt, which is about 6% more than what the average class of 2015 graduate had. That can be a serious hurdle to overcome, especially for those trying to turn start-up dreams into entrepreneurial realities.
“Many college students have already put themselves deep in debt to cover the opportunity cost of higher education,” Bruce McClary, vice president of communications for the National Foundation for Credit Counseling, said. “Students who are wishing to start a business under those circumstances should take a step back and examine the reality of launching a startup, and how that might influence their ability to manage their financial obligations.”
So, whether these include student loans, a cell phone bill, rent, car loan or anything else, it’s important to make a list and a strategy to keep them under control while you focus on your career goals.
Once that’s all in order, you can begin thinking about where you’ll get the funds for your startup. Don’t have a backer? Perhaps a new credit card is the way to go.
“A startup may need to rely on the founder’s personal credit initially — although they should work toward separating personal and business finances (and credit) as soon as possible,” Thomas Nitzsche, media relations manager for ClearPoint Credit Counseling Solutions, said. (More on this in a minute.)
Got It. Now, How Do I Choose the Right Credit Card?
There are a lot of credit cards out there for you to pick from. But finding the right plastic for your wallet comes down to more than simply choosing an issuer. Here are three major things to consider as you narrow down your options.
- Eligibility: Find out what cards you qualify for based on your credit scores.
- Compare Interest Rates: “Interest rates on credit cards are higher than other forms of financing for your business, so review all offers carefully to ensure that you are selecting the most affordable deal if you do decide to open an account,” McClary advised.
- Consider Fees: These can include everything from annual fees to balance transfer fees, so make sure to factor those into your budget, if applicable.
Ultimately, you will know what your needs are better than anyone, and chances are, there is a card out there that can meet most (if not all) of them.
Of Course, There Are Risks Involved
Remember earlier when we mentioned that it is wise to get your personal and business credit separate once you can? Here’s why: “If the company fails, the debt cannot be written off as easily as it would if it were in the name of the business,” McClary said. In other words, if your business goes down and you haven’t set it up as a limited liability corporation or other type of entity, you’ll go right down with it.
McClary also noted that “credit cards should only be used for short-term needs, not for ongoing business expenses like utility bills and employee salaries” as this isn’t sustainable and can lead you toward a land of extreme debt.
And Once Your Business Is Up & Running …
You don’t have to say goodbye to credit cards, as they’ll likely be a helpful tool as you continue to grow your business. “Cards that offer rewards points or cash back on purchases are appealing, especially when there is travel involved in the operation of the business,” McClary said. But you’ll want to make sure you’re using them responsibly and stay consistent about paying your statements on time.
“Paying on time, keeping balances low in relation to credit limits and avoiding too many open lines of credit are some of the things business credit card users should do to avoid financial setbacks,” McClary said.
These are some of the finer details that come along with starting a business, but don’t let them stand in your way of accomplishing your goal. After all, no one thought Northwestern’s Wildcats would make it to the Big Dance, but this team sure proved them wrong, not only making it but landing their first ever NCAA victory.
Brooke Niemeyer is the Deputy Managing Editor — Syndication for Credit.com. She writes about a variety of personal finance topics, with work featured on CBS, TIME, The Huffington Post, MSN, FOX Business, and others. She has a Master’s degree in Journalism from New York University and was a reporter for NBC before joining the Credit.com team. You can follow her @RNYBrooke.