To Charge or Not to Charge: Credit and Your Home Business

Financing is often the biggest obstacle faced by people planning a home business. Initial expenses like setting up a home office, buying equipment and advertising all require money -- which, for the typical small start-up, can be in limited supply.

The Small Business Administration reports that most home businesses are capitalized with an investment of $5,000 or less. While banks are willing to lend great sums of money for major ventures with bang-up business plans, it is difficult for the typical solo entrepreneur to obtain a business loan.

Although banks have no means of reporting how many micro businesses are financed with personal assets and credit, the SBA recognizes that for many, this is the case. The only statistic I was able to find on this issue came from the National Foundation of Women Business Owners, who reported that more than half the members they surveyed in 1992 used credit cards to finance their ventures.

While I don't recommend plastic as your first choice in obtaining business financing, there are times when it can make sense in the short-term.

The reasons are many:

==>No long application process - There is nothing easier than using an existing card or taking a lender up on an offer for a new card 

==>Protection against theft and defective merchandise- If your card is lost or stolen, the most you'll ever owe is $50, even if you don't report losing the card. If merchandise you receive turns out to be defective, you may be legally entitled to refuse to pay. (The item must cost more than $50 and the purchase must be made within 100 miles of your mailing address.) 

==>The ability to use the "float" - Depending upon when you make your purchases, you could have up to 45 days to pay. 

==> Added value - Some cards offer programs that give you points towards merchandise, travel or automobiles. Some even offer cash rebates. Others include extras like extended warranties on purchases, collision insurance on rentals and travel insurance on airline tickets. 

Note: You can quickly accrue points by charging items you usually purchase on a cash basis (like gasoline). Just be sure to pay these charges in full each month. 

==> Convenience - With a credit card, you can make almost any purchase quickly, without offering payment up front. This is especially true when making travel arrangements. For instance, when a guest indicates he or she will be paying in cash, hotels typically require payment in advance for the entire stay; while nothing is taken out of pocket when guaranteeing with a credit card -- you are not liable for the charges until the bill arrives.

Note: When making a reservation at a hotel, be sure to use an actual credit card for a guarantee instead of an ATM card. Your bank will treat the charge as cash out of your account, which could deplete your resources pretty quickly.

==> Record Keeping Ease -- Dedicating one card for your business makes it a snap to track your expenses.

Of course, there are dangers to using credit cards indiscriminately. Aside from the high interest rates and annual fees, many credit card companies are getting creative with extra consumer fees. Consumers must also be aware of the big picture: Too many lines of credit -- even empty ones -- can be just as harmful to your credit rating as owing too much. Make sure all payments are made on time, especially if you're using a card with a low teaser rate. One late payment could trigger a rate increase of 10% or more.

The Internet has some excellent sources to help you better manage your personal credit: 

Credit Information Center: Information on how to repair credit, choose the best credit cards, decode credit reports and more. http://www.creditinfocenter.com

Free Credit Analyzer: Calculate your credit-worthiness without submitting inquiries to a credit bureau. http://www.freecreditanalyzer.com

The Fannie Mae Foundation: This organization's mission is to help make home ownership affordable to as many Americans as possible -- they do an excellent job of educating consumers on how to make their credit history palatable to a mortgage lender. You can order their free Credit Guide online. It is a "must-read," even if you already own your home:

http://www.homebuyingguide.org/credit_e.html

When used responsibly, your credit cards can be a tool to help you stretch the dollars you have on hand, and keep your business operating smoothly. 

Donna Schwartz Mills is the Editor/Webmaster of the ParentPreneur Club http://www.parentpreneurclub.com, "where those who are doing the most important job of all hang their hats." She can be reached at http://www.parentpreneurclub.com/contact.shtml.

Tell a friend about this site