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The Pros and Cons of Using Credit Cards
to Finance a Home Business

One hurdle that most new home business owners face is that of acquiring financing. Using personal or business credit to fund startups is a growing trend that is quickly becoming common practice. There are certain advantages to using credit as an initial, and even a continual means of funding for a new home-based business. However, the disadvantages are so dire that many entrepreneurs seek alternative, non-traditional sources of capital to work with. Despite the risks, if home business owners using credit cards to finance their dreams employ the proper practices and safeguards, they can use credit to make their dreams come true.

The U.S. Census Bureau and various independent research organizations report that 10% of all home and small business owners use credit cards for business start up and even monthly operating budgets. The vast majority of home-based business ventures are funded with personal or family assets, and nearly 28% of all businesses start with no capital at all. These figures point to the rationale of using credit cards to finance entrepreneurial endeavors: personal savings are not always available. Because of the strict requirements for obtaining small business loans and business credit, many sole proprietors decide to use personal credit to fund their businesses. However, if they know how to maximize the advantages and avoid the pitfalls involved with this method of funding, business owners financing their efforts with credit cards can actually use their lack of capital to their advantage.

Credit card usage provides a convenient means of record keeping that is unrivaled by traditional methods. Business spending can be kept separate, accurate back-up records are kept by the lending institution, and purchases are not limited to any approved group of goods and services. For the business owner who is able to obtain a credit card with introductory 0% interest on purchases and/or balance transfers, the opportunity to essentially fund business startup with a no-interest loan is unbeatable. This puts an entrepreneur in a better position than they would be in obtaining a traditional small business loan. Furthermore, since most lending institutions do not approve loans for startups, this is one of very few viable options for interest-free business financing.

Even with the various benefits of using credit for business financing, there are some disadvantages to consider. Among the most severe of disadvantages is placing one's personal creditworthiness on the line for an uncertain business venture. Business credit is much better than consumer credit in these cases; it helps to establish business credit history for future borrowing purposes, it keeps business and personal debts separate, and makes the tracking and recording of business expenditures easier. However, many home-based business owners are not approved for business credit, so they use their own credit, which presents considerable risk to one's personal financial stability. In either case, if profits are not made quickly enough, a mountain of debt awaits. This kind of pressure to produce can increase stress and thereby decrease efficiency and actual productivity. One must be equipped and ready to handle the responsibilities involved with using credit as a means of home business financing.

There are, however, alternatives for entrepreneurs with little to no startup capital who do not wish to use credit cards to finance their endeavors. Aside from borrowing from family and friends, or seeking out small grants from independent benefactors and organizations, there are now non-traditional borrowing opportunities available like those offered on Prosper.com. Using an online auctioning platform similar to eBay, borrowers create listings (up to $25,000) reflecting what they need and are willing to pay a lender, and various independent lenders bid for the loans, competing for the most favorable interest rates. The deals are brokered by Prosper.com, which collects a nominal fee for the service. Options like these should be considered before using credit to finance home business startups.

If using credit cards for financing is the final decision of a business owner, there are ways to ensure that risk is minimized. Using restraint in spending and making frugal choices is paramount. It is easy to overspend when you are not spending actual cash, so you have to exercise great discipline and think carefully about each and every business-related purchase. Keeping accurate records of spending is also important. Besides the fact that keeping track of every penny spent helps to stay disciplined in spending, inaccurate accounting records can be costly in the event of an IRS audit. Furthermore, eligibility for various tax incentives depends on expenditures that need to be substantiated with receipts and records.

If a business owner is pursuing an opportunity with a sound business model, is realistic in his or her earnings expectations, and is capable of using credit responsibly, financing a home business venture with credit cards can make entrepreneurial dreams a reality.



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by Steve "AmCy" Brown, American CyberSpace®

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