Should you start a business on zero percent credit?

By Peter Andrew

I'm not what you'd call a natural entrepreneur. In fact, every venture I've ever tried to set up has turned to dust. But a few years ago, I inherited a small sum of money, and couldn't find anywhere to put it where it would earn a reasonable, relatively risk-free return. So I once again considered setting up my very own micro-enterprise: I planned to buy a cheap, run-down home, do it up, and then flip it before starting the process all over again.

A number of questions arose: Would my meager windfall be enough to fund such an operation? If not, where should I obtain working capital, especially as my bank and I are barely on speaking terms? Should I be ready to let credit cards take some of the strain?

Zero percent credit cards as seed capital

Given my track record, it's probably just as well I left the money in something my bank, without any trace of irony, calls a high-interest savings account. But should I have gathered some nerve and taken the plunge, having first applied for a clutch of zero percent credit cards? Maybe.

The idea of using the interest-free introductory period that many cards offer to fund a start-up business sounds attractive, and there are plenty of stories online about entrepreneurs who used plastic to get their companies off the ground.

You can see the attraction. At the time of writing, at least three of the best zero percent credit cards are offering a full 18 months free of interest for both balance transfers and new purchases. True, you normally have to pay a fee (often 3 percent) when transferring a balance or using one of the card's checks to turn the credit into cash. But that's still very cheap money: about $600 to borrow $20,000 for nearly 550 days. And if you use the plastic to make purchases in the normal way, you really are borrowing the money for free during that period. Heck, you may even make a few bucks, if you pick one that has a sign-up bonus.

Reasons to beware

The trouble is, as we all know, nothing in life is free, least of all money. And no matter how high your regard for the credit card industry, you have to acknowledge that zero percent deals are not being offered as acts of charity. Purveyors of plastic are wagering that you're still going to have a substantial balance at the end of the interest-free period. Indeed, another pretty safe bet is that they have computer models that show they make profits on these offers -- no matter what individual borrowers promise themselves when making applications.

Maybe you'll be one of the fortunate ones who won't end up coping with the 22 percent (or more) APR some issuers charge the less creditworthy when the introductory period ends. But in business, few things are so certain. My all-time favorite quote, which I repeat ad nauseam to anyone who'll listen, was said by the late Harvard economist John Kenneth Galbraith: "The only function of economic forecasting is to make astrology look respectable."

As it turns out, I probably could have sold within that interest-free period the homes I planned to flip in my unrealized business plan. But that's only because the real estate market is recovering so quickly, and, back when I was lying awake at night fretting over risks, nobody knew for sure that was going to happen. If things had turned out differently, I could now be in real trouble, struggling to make payments and watching my credit score plunge.

Calculate risk

Having made so many bad ones of my own, I don't dare judge other people over their financial decisions. If you choose to take every cent you own to Vegas and put the lot on 17, that's entirely a matter for you. But few of us do that, because we try in our own deeply flawed ways to calculate risk.

As a society, we admire those who take risks that pay off. And this article isn't an attempt to prevent you from funding your new venture with cheap credit card debt. It is, however, a plea for you to think very, very carefully before you do so.