Finding a viable source to finance new home business setup can be quite tricky, and it's a major concern for every entrepreneur. You must consider all the possible alternatives before arriving at a decision. The source for finance must be economically feasible and should have a minimal risk level. Credit card financing is one of the popular ways of funding a home based business.
Credit card financing has its own set of benefits and risks, similar to other sources of financing.
Benefits of Credit Card Financing
- Low Interest Rates - Most credit cards have reasonably low-interest rates. A low-interest credit card can help you to save money. However, not everyone qualifies for a low-interest rate credit card. If the interest rate on your credit card is high, you should opt for a small business loan instead.
- Deferred Payment - Many home-business owners use their credit cards to finance their businesses. Credit cards allow you to make credit purchases or get cash advances. You can then pay the credit card company at a later date.
- Easy Access to Cash - Credit cards are the easiest way to get cash. If you are in urgent need of cash, you can withdraw money by using your credit card. However, cash withdrawals from a credit card usually attract a very high interest rate.
Drawbacks of Credit Card Financing
- Expensive Source of Funding - Credit cards can be a very expensive source of funding if you have a poor credit history. The cash advance rates of credit cards can be as high as 17% to 19%, due to the increased number of fraud cases. Credit card companies usually charge 2% to 4% of the total value of a cash advance as "fee."
- Rising Interest Rates - Credit card companies may increase your interest rates if you start financing your home business with your personal credit cards. Find a credit card company that offers fixed interest rates. Do not exceed the credit limit, as this will cost you more money.
- Credit Limit Reductions - Credit card companies might also reduce your credit limits with time. You can deal with this problem by withdrawing as much as possible in cash advances. Make your payments on time and stick to your credit limit.
You should use credit cards only to finance asset acquisition like purchasing computers, fax machine, telephones, etc., while you are starting off your business.
Financing your home business with a credit card should only be done until you can get finance from the bank. Borrowing too much on your credit card can affect your personal credit history. Banks look for your personal credit history before providing a business loan. If you borrow a lot on your credit cards, the banks would either deny you a loan or charge a higher interest rate.