Using credit cards to start a new business

Q. I want to start a new business and I will need to spend about $25,000 to set it up. I only have $14,000 saved and I’m thinking of using my credit cards. Then when the income comes in, I can pay them off. I know it’s not the best choice but if I haven’t been able to save enough. What do you think?
— Entrepreneur

A. Getting start-up cash for a new business is tough, and many businesspeople end up borrowing to get started.

But using credit of any sort, whether it be credit cards, a mortgage or a line of credit, is something that needs to be carefully considered.

Typically, you need a lot of discipline to do it right, said Howard Hook, a certified financial planner and certified public accountant with EKS Associates in Princeton.

“Debt can accumulate quite quickly and can do so even faster when the rate to borrow is high,” Hook said. “Even the best intentions to pay off debt once profits start can be troublesome.”

As a business grows, Hook said, you may find the need to borrow increases and does not go away.

You may also feel a strong desire to pay yourself rather than pay off debt, he said.

And even if you do not take any money from the business, if it is profitable, you will need to pay income tax on the profits. here will the cash come from to pay the taxes?

While these issues may all sound quite negative, it’s really just really intended to raise questions you may not have contemplated, Hooks said. However, if you really believe in your business and its ability to make money, then borrowing may be okay.

He recommends two strategies to move forward.

First — and he’s not kidding here — Hook said he’s an avid fan of the television show Shark Tank. He recommends you binge watch a couple of episodes of the show.

“You will learn a lot about what it takes to finance a business and also learn the difference between a business and a product,” he said. “You will also get a good dose of reality of how hard it is to succeed.”

If you pass that test, he recommends you prepare a business plan including a cash flow projection. This would show you and potential lenders, among other things, how your business will grow and what your cash requirements will be.

“The cash flow projection will also allow you to see how and when you will be able to pay back your lenders and still take money for yourself,” Hook said.

Karin Price Mueller writes the Bamboozled column for The Star-Ledger and she’s the founder of NJMoneyHelp.com. Click here to sign up for the NJMoneyHelp.com weekly e-newsletter. Like NJMoneyHelp.com on Facebook and follow it on Twitter.