Startups from the Cellar: Using a Credit Card to Launch a Business

Just like many great bands began in someone's garage, a lot of very successful companies sprang to life in entrepreneurs' basements. Google (NASDAQ:GOOG) started as a very small company that has blossomed to one of the biggest companies in the world. Guitar Hero was a fun idea that became one of the highest- grossing games of the tech era. Both companies were started on credit cards.

In January 1996, Stanford University Ph.D. students Sergey Brin and Larry Page were working on the research project that later became search engine powerhouse Google. They ran the project out of their dorm rooms with Page’s room serving as the data hub and Brin housed the business office. They reduced costs by buying used computers and open-source software. In 1998 they founded what would become the world’s top search engine by spreading their costs across three credit cards. Back then Google was hitting 10,000 searches a day. Now it’s millions of daily clicks and the company currently employs more than 30,000 people worldwide.

Charles Huang designed small plastic guitars when he maxed out his credit cards to finance RedOctane, the publisher of Guitar Hero. It is one of the most popular video games of the 21st century and the series went on to sell more than 25 million units worldwide and brought in $2 billion in retail sales. Activision acquired RedOctane for nearly $100 million in 2007, proving Huang’s investment paid off big time.

Financing a Startup

Entrepreneurs can choose different options to finance a small business startup including loans from private banks, investors, government grants, and/or credit cards. Creating high credit card balances to launch a business tends to be discouraged, but by the late 1990s entrepreneurs were increasingly using credit cards to start their business. By 2009, funding a startup with plastic was a normal business practice because the financial crisis froze credit markets that are still thawing.

Business owners now routinely watch interest rates and take advantage of balance transfer offers with low introductory rates. If a company’s credit score is excellent, credit limits can go up to $100,000. Credit card companies also usually extend limits as long minimum payments are made on time each month.

Money is There When You Need It

When using credit cards to fund a startup, a company should only draw the money that it needs when it needs it. Credit cards are perfect for short-term needs as long as they are paid off in the short term. Companies should avoid unnecessary spending, and credit cards should not be used to pay salaries or rent. But they can be used to buy supplies or to finance short-term projects.

Most credit card companies itemize the purchases by merchant categories, which makes it is easier to track spending and create budgets. Always pay off all the balances in full each month if possible to avoid interest charges.

Not every business will become a household name like Google, but many successful ventures have and will spring forth from credit card financing.

Michael Germanovsky is a personal finance expert with in-depth knowledge of credit cards, charge cards, and pre-paid cards. His tenure as a personal finance expert began at the Novoye Russkoye Slovo, a partner of the New York Times International Weekly. In 2011, Germanovsky created the Student Credit Card Education Initiative and sounded awareness of high interest rates. At large, Michael is editor-in-chief at Credit-Land.com.