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In the Cards?

While enticing, credit cards may not be the best way to finance your startup.

Question: I don't have the capital to start my business, So I'm considering using the credit card offers I receive in the mail to get off the ground. But my wife is worried that we'll get in over our heads. What are the risks of doing this, and what do I need to know?

Answer: While many entrepreneurs have built successful businesses using credit cards, you should think twice before jumping at those zero percent offers. The low introductory rates can be tempting, but eventually you're going to have to pay up--at rates that are often into the high double digits.

That's not the only problem. Even if you have a million-dollar idea, you risk putting your company and your credit rating in jeopardy if your business can't make enough to cover your monthly card payments. "[Credit cards are] cash flow unfriendly, because repayment begins immediately, and most startups don't generate revenue from Day One," says Eric R. Eaton, CEO of Egyptian Builders Consulting Group LLC, a firm that provides interim CFO, financial management and tax services to startups.

Instead, Eaton recommends determining how much capital you'll need, then asking business associates, close friends and family members for loans that will allow you to defer making payments until the time when you believe your company can start generating the cash flow you need to service your debt.

Rosalind Resnick is the founder and CEO of Axxess Business Consulting, a New York City management consulting firm that advises startups and emerging companies. Reach her by e-mail at rosalind@abcbizhelp.com or through her website, abcbizhelp.com.

Rosalind Resnick is a New York-based freelance writer, entrepreneur, investor and author of The Vest Pocket Consultant's Secrets of Small Business Success.

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This article was originally published in the March 2008 print edition of Entrepreneur's StartUps with the headline: In the Cards?.

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