There's something romantic (in an economic sense) about financing a successful small business by maxing out your credit cards. We hear exciting stories about this all the time. What we don't hear are the stories about new business owners who maxed out their credit cards and then failed. So before you turn to plastic for financing, consider the risk.
It's true that credit cards can be a fantastic source for large amounts of capital. A credit card, after all, offers a line of credit with limits as high as $10,000, $20,000 or even $50,000 for a small business card. Since it's a line of credit, you don't need to fill out a loan application or submit a business plan each time you need an infusion of cash. Just swipe away!
A credit card allows you to carry a large balance as long as you make timely minimum monthly payments. Conceivably, you can leverage a debt of $50,000 with $50 monthly payments. But the question is, do you really want to?
The huge drawback of credit cards is that they carry very high interest rates. At the time of this writing, the average interest rate for a balance transfer credit card is 13.2 percent [source: Bankrate.com]. So if you choose to use a credit card for start-up capital, make sure you have a plan to pay it back quickly. If not, that interest will add up fast.