To start your own small business, you don't need investors or a traditional business development bank loan. Small business financing could be possible if you own a home or have good enough credit to open revolving credit card accounts.
The key to using credit cards to fund a small business is to open the cards under the name of the business. If you use credit cards for your business, the IRS lets you deduct every single penny of interest you pay on those cards.
David Newton teaches business finance at Santa Barbara, California's Westmont College. He says that credit cards can be used to finance a small business in two main ways: 1. Buying assets, like equipment and supplies, and 2. Having cash on hand to use as capital. He does, however, think that using credit cards to fund a small business is a very risky thing to do.
"Credit cards should be replaced as soon as possible by more traditional bank financing and/or leasing arrangements, once the business has reached the break-even point and monthly sales can cover normal COGS (cost of goods sold) and overhead expenses."
A home equity loan is a more traditional way to do things. Most banks offer home equity loans for 125 percent of the fair market value (FMV) of the property. For example, if your home is worth $300,000 and you still owe $100,000 on your mortgage, you already have $200,000. The bank would give you a loan for the amount of equity plus an extra 25%, or $75,000 in our example. Then you could start your small business with $275,000.
But with a credit card, you can deduct all of the interest, while the IRS puts a cap on how much you can deduct from a home equity loan. In IRS Publication 936, the amount of interest that can be deducted is limited to either $100,000 or the value of the home minus the amount still owed on the mortgage, whichever is less.
Entrepreneur.com shows that home equity small business loans have some problems. "You might have to pay fees at the start, at the end, or every year. Some home equity loans also require a big payment at the end, called a "balloon payment." Others, on the other hand, require higher monthly payments. If you choose a loan with a large balloon payment, make sure you know how you will pay for it. In some cases, you may need to borrow more money to make the balloon payment."
If you use your home as collateral, you could lose it if the business fails or if you don't pay back the loan.
