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Using Personal Credit Cards for Business Funding — Risks vs Rewards


Generating working capital is vital for fueling the growth of SMEs. Unfortunately, it’s often easier said than done, and a growing number of business owners are now resorting to using personal credit cards for business funding.

Recent data from a Mercator Advisory Group report found that over a third (36%) of all SMEs use personal credit cards for B2B purchases, and millennial business owners are even more likely to use them at 49%. 

But is this a good idea? Or is it something that can put your business and personal finances in jeopardy?

In this post, we’ll examine the risks and rewards of using personal credit cards for business funding so you’ll know whether or not it’s the right move for you.


The Risks

Let’s start with the cons. Here are some of the main issues you should be aware of.

It Can Hurt Your Personal Credit Score

The first problem is that it can adversely affect your credit utilisation ratio, which is the amount of credit you’re using divided by the amount of credit you have available. 

“If you use a separate personal credit card for all your business-related expenses, know that you can negatively impact your personal credit score with your business purchases,” explains lending and credit card writer Jason Vissers. “If you charge a large business purchase to your card, your credit utilisation ratio will be affected until you get reimbursed.”

Say for example, you have a credit limit of $10,000, and you use personal credit cards to buy a piece of equipment like a lathe machine that costs $8,000. That would instantly bring your credit utilisation ratio to 80%, which is far higher than the recommended rate of 30%.

In turn, this would likely lower your personal credit score, especially if you only made small payments. So this is definitely something to be conscious of. 

If you can quickly pay off the bulk of your credit cards and keep your credit utilisation rate low, it shouldn’t be a problem. But if you have to drag payments out over time, it’s almost guaranteed to hurt your personal credit score.


High Interest Rates

Another issue you have to contend with is interest. According to WalletHub’s Credit Card Landscape Report, new offers have an average interest rate of 19.21%, while it’s 15.10% for existing accounts. 

That’s significant and can really add up for SMEs who make large purchases. After all, money spent on business expenses will likely be much higher than it would be on personal expenses. This basically results in an additional cost on top of everything else, which can potentially put you in a precarious position. 

On the other hand, there are many other business funding options that don’t come with steep interest rates. Debtor finance, for instance, is a type of funding that revolves around using outstanding invoices as collateral where you get a cash advancement on money that’s owed to you. With it, you don’t have to deal with any interest and simply pay a small fee to a lender.

The point here is that it’s important to pay close attention to the interest rate when choosing a personal credit card. You’ll also want to do everything you can to earn an excellent credit score, as this often makes it easier to become eligible for low interest credit cards.


It Can Lead to Major Debt

Putting business expenses on your personal credit cards is convenient. But that convenience is a double-edged sword because of the huge debt it can create if you’re not careful.

It’s a lot easier to swipe a credit card rather funneling profits back into your business when reinvesting. Some SMEs also have a tendency to get “swipe happy” and not fully thinking through purchases. But you can run into trouble if you go overboard and fail to figure in the logistics of repaying your debt.

Therefore, you need to be careful when using your personal credit and be selective with your purchases. It’s usually wise to keep this type of spending to a minimum and not allow it to become a crutch.


The Rewards

Now let’s discuss the pros. Here are some of the top benefits of going this route.

You Don’t Have to Qualify for a Business Credit Card

There are numerous criteria you have to meet to be eligible for a business credit card. For instance, you need to provide information like your business structure, annual revenue, monthly spending, and so on.   

While the qualifications aren’t necessarily rigorous, not all SMEs qualify for the business credit cards they want. 

But when you use a personal credit card, you can bypass all of this and don’t have to deal with nearly as many eligibility requirements. You can simply use the personal credit cards you already have and leverage them as a resource for generating capital.


You Can Build Personal Credit 

Assuming you use it responsibly and don’t consistently spend near your credit limit, this can be good for improving your personal credit. 

Say for example, you have a credit limit of $10,000, and you use personal credit cards on occasion to cover relatively small business expenses. As long as you keep your credit utilisation ratio under 30%, always make payments on time and pay beyond your minimum payments, this should give your personal credit a boost. 

This can come in handy if you’re someone who’s historically struggled with your personal credit or simply you’re looking to establish credit.


Bonus Rewards

Many personal credit cards also offer some nice rewards, which can potentially offset certain business expenses. For example, “Travel rewards credit cards give you points or miles for each dollar you spend; you redeem those rewards for free flights, hotel stays and more,” says travel and credit cards expert Sara Rathner.

So if you consistently travel to meet clients, this could definitely be an asset and result in some considerable long-term savings. And if you frequent a particular airline or hotel, there may be credit cards that partner with your brand for even bigger rewards. 

It’s just a matter of choosing personal credit cards with the specific types of bonus rewards that are most important to you.


The Bottom Line

Using personal credit cards for business funding is a popular choice for many SMEs, especially younger ones. It can certainly be a viable funding source for some business owners. However, it comes with some inherent risks that you should be aware of. 

Having a clear understanding of the pros and cons is key for making the right decision and mitigating these risks. 

If you do decide to go this route, you’ll want to do your homework and make sure that you know what you’re getting yourself into. And of course, you’ll always want to be responsible with your purchases and not do anything that could jeopardise your credit score or overall financial health. 

It’s also a good idea to look at other types of business funding to see if there are any better options that make more sense for your specific situation. That way won’t have to put yourself at unnecessary risk and can keep your business heading in the right direction.


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