Credit Card

Monday, June 11, 2012 at 3:48pm by Site Administrator

Financing Your Home Business with a Credit Card: Worth the Risk?

With the economy in a down-swing, banks are less likely to take a chance on new businesses. For sole proprietors and other types of small business, securing a loan can be next to impossible. In order to cover the costs of beginning a home business, many entrepreneurs turn to credit cards to finance their purchases. Although business credit cards can be a great financial tool for a business enterprise, they are certainly not risk-free, and it’s important to carefully consider all of your options before making a decision.

Pros of Using a Business Card:

  • They’re easier to qualify for than a business loan.
  • You will have instant access to cash so you can start your business right away.
  • Business cards usually come with rewards that can be used toward growing your business.
  • Business credit cards enable you to begin building credit for your business separate from your own credit.
  • Many cards have low introductory rates so you can spend without interest at first.

Cons of Using a Business Card:

  • If you don’t make your payments, you will be held personally liable for the business’s debts.
  • The card application will rely on your personal credit score, so you may not qualify for the card you want.
  • Interest rates can rise dramatically after the introductory rate.
  • Many business credit cards have annual fees.
  • The credit limit may not be high enough to cover your needs.

Should You Get a Business Credit Card?

There are many reasons why a business can benefit from a credit card. It enables you to keep business expenses separate from personal spending. It earns benefits like cash back rewards, airline miles or gift cards. It can provide other members of your company with a way to spend company money without the complexity of petty cash. Business credit cards are not a financial panacea, however, and you should be especially careful when applying for one for a new business.

If your company is not successful, you will be stuck not only with the cost of your purchases but also the cost of interest. Revolving credit balances quickly generate high interest fees, and you can end up over your head in debt. Credit cards may also have much higher interest rates than loans, so even if you feel like you’re saving money, you may pay more in the long term if your credit card carries a balance than if you had simply taken out a loan to open your business.

In some cases, it might be prudent to wait until your business has already begun growing its own credit before applying for a credit card. This will help relieve you of some of the risk and make you more qualified to take a larger credit limit. Of course, this is not always available, and for companies that rely on credit to get started, waiting until credit has been formed is impossible.

Ultimately, the only way to decide whether a credit card is a good idea is to honestly assess your business’s needs and determine what will work best for you. If you believe that the benefits of having a business credit card outweigh the associated risks, you can certainly use the financial freedom associated with a card to launch your home business.

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