The vast majority of entrepreneurs finance their startups through credit cards, according to a number of recent surveys. One such study by the Pioneer Institute found that the two most common financing methods for companies with fewer than five employees are loans from relatives and credit cards.
While few doubt the value of credit cards for financing a startup, they can be risky. Accordingly, entrepreneurs and small business owners should consider how they can or cannot benefit from lines of credit.
Credit card reform legislation in 2009 limited the amount issuers can raise interest rates, but key provisions excluded small businesses from the statute, leading to recent hikes in interest rates on small businesses.
What's more, because the majority of small companies in the U.S. are sole proprietorships, the owners stand to be liable for any incurred debt or financial obligations - a stipulation that encourages many entrepreneurs to incorporate in New York, California or any other state in order to protect their personal assets.
"Unless your business is incorporated, you're the de facto guarantor of all business debts," writes Asheesh Advani for Entrepreneur magazine. "So if your business has a slow sales quarter and you fall behind on your credit card payments, your personal credit rating and your personal ability to borrow are at risk."
Tags : form an llc, incorporation, small business management
Posted: Jan 28th, 2011