Is credit card stacking a good way to fund my startup?

Even though it might feel like there’s no way to get a loan, many startups are choosing to open up several credit cards to reach a higher total sum. Doing this can get you money quickly and without much hassle, but your reward is a frustrating balancing act to juggle many cards and their various limits, deadlines, and interest rates.

Combine Several Business Credit Cards

This alternative financing method is called “credit card stacking.” The basic idea is to combine several business credit cards to reach a larger total sum than you could get with one card.

You have two ways to do credit card stacking. You can apply for several cards at the same time, or you can use a third-party firm, sometimes called a “stacking lender,” to find and apply for cards.

Business credit cards can be easier to get than loans for several reasons:

• You may be able to get a business credit card with less time in business.
• Some business credit cards have no minimum revenue requirement.
• You probably won’t need collateral.
• Approval mostly rests on your personal credit.

Typically, even if you use a creative financing strategy you’ll still need to have good-to-excellent credit (690 or higher), at least on your personal accounts.

Here’s how it works.

The first step of stacking is deciding which cards to go for. Some issuers say they’ll deny you because you have too many new applications. The key to pulling this off is to submit all applications at once so issuers don’t see multiple recent inquiries. One trick is to pick cards that pull reports from different bureaus, such as Experian, TransUnion and Equifax.

Look for cards with attractive features like:

• Long interest-free periods.
• Cash-back rewards.
• Benefits tailor-made for businesses.

You can do the research and applications yourself, but several companies offer to do the grunt work in exchange for fees. Some examples are Fund & Grow and StartCap.

Card stackers such as Fund & Grow or StartCap may offer to:

• Find card offers from different banks that you qualify for.
• Handle the applications to each bank.
• Provide counseling afterward to manage the stack of cards.

Stacking companies can cost you a lot:

• Some charge a membership fee before any funding.
• There’s also a post-funding fee of 8% to 12% of the total you receive.

Going through a stacking firm can also be slower than doing it yourself.

Step two is the fun part: using the credit. Each approved card has its own preset limit, and the limits add up to your total credit. Spread your spending across the cards, or choose the lowest-rate card for most of your purchases.

Some credit cards let you draw cash using the same process as an ATM withdrawal. Be careful: cash advances can carry high fees, up to 5% of the amount you take.

The ideal outcome is to pay off each card in full before interest kicks in.

You avoid interest costs.

You avoid overwhelming payments, and you keep your financial life in order.

Credit cards aren’t a one-time thing but revolving credit; once you pay down your balance, you can draw on it again, up to your limit.

As for the upsides, if you have good personal credit, your approval odds can be high. And there’s no collateral, and no ownership is involved.

If you have a few minutes to spare, you can apply for a card or two from the comfort of your couch. Your credit can land in your account almost immediately.

Business credit cards often give you rewards for your spending, offsetting their costs.

Good management of a business credit card can improve your business credit rating, setting you up for future funding.

Cons of Stacking

The cons of stacking are significant, though. Card stacking is more expensive if you carry a balance for any period of time, or overborrow in general. Typical APRs on credit cards run from about 16% to 34%. With multiple accounts and compounding fees, you can quickly fall behind. Some cards charge annual fees of $700 or more.

Credit card stacking hinges on your personal credit. An applicant with weak credit is likely to get denied, or to receive approval only for small amounts.

Managing a stack of credit cards means juggling many bills and due dates each month. The system only works if you can keep track of it.

Missed payments let interest pile up, creating a hard-to-escape debt cycle that strains your cash flow.

Applying for several cards means several hard inquiries, all at once. That hurts your credit score, but it’s usually only temporary. Most business cards require a personal guarantee, meaning nonpayment hurts your personal credit.

Signs That Stacking Could Be Right for You

Is credit card stacking right for you? Only you know.

Here are a few signs that stacking could be right for you:

• You have good credit (690+).
• You’re a startup, pre-revenue or early-stage.
• You need short-term working capital.
• You can realistically pay off balances before interest kicks in.

Credit card stacking is probably not for you if:

• You can qualify for safer, cheaper financing.
• You struggle with cash flow.
• You have trouble tracking many due dates.
• You need long-term funding.
• Your credit is fair or poor.

If you still aren’t sure if credit card stacking is right for you, here are a few alternative financing options worth considering:

Business lines of credit are great for small businesses that need revolving funds to cover recurring cash flow gaps.

They’re available from banks and online lenders. You can get a credit line of $250,000 or more. Some lenders like Headway Capital and OnDeck accept lower scores than typical credit cards.

Online term loans are ideal for businesses that need fast capital.

The process is quick, and funding happens as quickly as the same day. Some online lenders can put up to $1.5 million in your bank account. The key catch is that online loans often have higher interest rates than bank loans, with less favorable terms.

Invoice factoring may suit B2B firms whose money is tied up in receivables.

You can get the capital by selling unpaid invoices to another company for a percentage less than face value.

CDFI loans can be good options for owners with bad credit.

Community development financial institutions (CDFIs) are non-bank lenders who usually serve underserved communities, with more flexible requirements.

Equity financing can help startups raise money before revenues begin to flow.

That means you’re selling a chunk of your company to an investor, often a venture capital firm or an angel investor. You get funds without paying it back. The downside is that you could dilute your ownership and end up giving away control of the company.

As for legality, stacking cards is legal, though some lenders forbid loan stacking, meaning taking out multiple loans at once.