January 14, 2008

Home-Based Businesses: Use Your Credit

Back in my days as a small business lender, I asked a loan applicant why he wanted to borrow money from a bank when his accounts showed an abundance of cash. He imparted the following wisdom that I’ve carried with me ever since: Use your credit—your cash is always good. But most business owners don’t have the luxury of being cash-rich and for them, the bankers rarely come a callin’.

You’d think it would be easy to raise a small amount of money, easier than if is a large amount, anyway. But that’s not really true. It takes just as much paperwork for a lender to document a $1,000 loan as it does a $100,000 loan, so there really aren’t many places where you can rent small amounts of money. (That’s essentially what you’re doing when you borrow money, after all.)


The easiest way to round up a small amount of money is to borrow on credit cards. And it’s often the cheapest alternative as well, since many issuers have very low teaser rates (0-4%). Just be sure you either pay the balance before the rate changes (usually in a 3-6 months) or pay it off with another low rate credit card. Duh, you do that already, right?

What you may not realize is that if you have good credit you can get a load of credit cards, and you don’t have to go through an elaborate loan approval process to find out if you qualify. Fill out one short form and with good credit you’ve got your money. And, if you pay your bills on time, you’ll be building a good credit history that will help you when it comes time to apply for a larger loan. The moral of the story is apply for the cards BEFORE you get into a cash crunch.

The bad news about credit cards is that because they’re so easy to obtain, it’s easy to get in over your head and wind up more debt than you can handle. So start slow! Be careful about buying more supplies or brochures or paper or whatever than you need just because the per-unit price is lower at higher quantities. Don’t borrow more than you need to support existing orders either. And pay your bills before you pay yourself. Handle these small ‘loans’ right and you’ll build a strong credit history that will pave the way to more traditional financing.

For more help on small business loans, angels and other private investors, venture capital, government loans and grants, preparing a business plan or financing application, and other money management advice, check out our all new, fully revised eBook, Finding Money—Secrets of a Former Banker.

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  4. Buying A Business? Or A Headache?
  5. Home Business Owners Should Plan On Shinola
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