NFIB

Unless you came into this world with a generous personal savings account, you're probably in the same boat as most new small-business owners––trying to figure out how to finance your dream.

The traditional route is by taking out a bank loan, but more and more entrepreneurs are turning to credit cards to help with their start-up costs. This method has its benefits, but also comes with many risks.

Pros of credit card financing:

• Easier to acquire than traditional bank loans
• Can manage debt between multiple cards
• A good way to build up your credit
• Credit card reward programs let you acquire points toward items that you will use in your business

Cons of credit card financing:

• High interest rates
• High late payment fees
• Making only the minimum payment each month can quickly make your debt unmanageable

Therefore, it’s important to be savvy if you choose to finance your business with plastic. Here are a few dos and don'ts to keep in mind:

Don't charge more than you need. When you apply for a loan, your lending officer will want to see a detailed business plan that expresses what the funds you're asking for will go toward, with specific amounts allocated for each. Credit card companies will not ask for those specifics.

This doesn't mean, however, that you should take a more relaxed attitude toward your finances. Follow your budget––figure out how much you can afford to spend each month and stick to it. Don't go over simply because your high credit limit gives you more leeway.

Do pay off as much as you can each month. Putting all of your business expenses on credit cards is not a bad idea––as long as you pay in full every month. Your monthly statements will give you a good breakdown of the areas your funds are going toward and will help you adjust your budget accordingly. However, if those statements start carrying a bigger and bigger holdover amount each month, you likely won't want to study them quite as closely.

Most small businesses experience slow months, and yours will probably be no different. If you receive a statement that you can't pay in full, pay as much as you can and make sure you find a way to adjust the next month’s budget, so you'll have some extra funds to pay off the extra amount when the next statement comes.

Do separate business and personal expenses. Get a credit card that is specifically for your small business and don't use it to buy your schoolbooks or to treat a friend to a non-business lunch. Once your business grows to the point that you want to apply for a business loan, it will be in your best interest to have a business-only credit account your bank can consider.

Don't let your personal finances slide. Even if you have perfect credit on your business accounts, as a business owner, your personal credit history will be open to scrutiny when applying for loans. Don't pay your business expenses by ignoring car or personal credit card payments.

Do consider all of your options. While credit cards are the best option for many start-ups, remember that you have a source of financing open to few small-business owners: student loans. Even if you have scholarships, you may be eligible for loans to help you cover your living expenses. Whereas credit card debt can quickly compound, student loans are meant to be long-term loans, with several payoff options. You also have the chance to consolidate multiple student loans, which will help to keep your monthly payments down. The final benefit of student loans is that you won't have to start paying them until after you graduate from school, whereas that credit card statement will arrive every month. If you play your cards right, by the time you graduate, your business will be turning a profit that will make those monthly loan payments perfectly manageable.