Let’s face it, we live in a plastic world. Gone are the days of waiting in line as someone counts change for an iced coffee. Today, we swipe credit cards — or tap our phones — to pay for items on a daily basis.
Credit cards can be a convenient way to pay, but they can also be a slippery slope. It’s easy to swipe away unabashed, only to panic when the bill arrives. Getting into personal debt is never a good thing. It can be devastating for small business owners. If you’re an entrepreneur or small business owner, proper credit card use could mean the difference between growing your business and closing your business.
According to the National Small Business Association, credit card use among small businesses remains strong, despite worsening credit card terms and increasing debt. The NSBA reported in November 2015 that, “There is a clear correlation to a small business owner’s ability to hire and his/her ability to get financing. Although the number of firms that report being affected by the credit crunch continues to drop — down to 61% from 66% six months ago—one-third of small firms still struggle to get the financing they need.”
The NSBA also noted in the report that there was a notable jump among small firms that rely on credit cards for financing. Business credit cards can help better manage your cash — and can also provide valuable rewards that can help maintain your business.
The big question is: how do successful businesses use credit cards wisely to not only stay afloat, but also grow their business?
Generally speaking, business credit cards are ideal over personal credit cards for many reasons. Not only for the business-specific benefits, such as employee cards and spending controls, but also for other benefits, such as higher credit limits and the possibility of rewards that can go toward phone bills and office supplies, says Claire Tsosie of NerdWallet.
But it’s important to know that when you sign a personal guarantee for business credit cards, which most banks require, you are then liable for the company’s debt, Tsosie notes. “Several issuers also weigh your personal credit score heavily when deciding how much credit to extend to you. It’s not surprising that the reporting, too, is a mixed bag,” she says.
PROPER CREDIT CARD MANAGEMENT
Strong credit card management is critical to your company’s success and growth. When applying for a business credit card, consider this your first opportunity to build a relationship with the issuer. That way, when you need a line of credit or loan, you have a real person to call — not an automated system, suggests small business expert Darrell Zahorsky.
When applying for a business card you may need to use your personal credit, but after that, keep the two separate. If you mix your expenses, any missteps will affect both your business and your personal finances. Furthermore, keeping things separate and using your business card for business expenses shows the IRS that you are serious. Down the line, this could help you get more credit and improve your rating, reports Lou Dubois for Inc.com.
Zahorsky also cautions to avoid the dazzle of deals and the almost irresistible urge to sign up for multiple cards. Doing so could have a negative impact on your credit rating. Also, avoid the cash advance feature on your card, as this can cause you to rack up more fees and higher costs in the long run.
Most credit cards offer a 21-day grace period. Use it, says Zahorsky. Avoid late payments. Fees and increasing interest rates can quickly mount and also wreak havoc on your reputation with creditors.
Perhaps one of the most important things to consider is how you manage your cash flow. “First off, look at your business plan and your monthly budget,” says Beverly Harzog, a financial journalist and spokeswoman for cardratings.com to Inc.com. “When you know what your cash flow is going to be from the beginning to the end of the month, specifically which days might be higher than others, that can be a huge benefit to you. You can then negotiate with your creditor your balance due date so it coincides with the flow projection.”
When it comes to small business credit card rewards, which I mentioned earlier, they can often be tailored to your specific needs, so it’s important to do your research and compare the benefits of different credit cards. A good website for that is CreditCards.com.
MANAGING EMPLOYEE CARDS
If you have employees who use your business cards, make sure you monitor their spending closely. Set specific guidelines and have a written company policy on the use of the cards — and check the statements you receive. If you do your banking online, which you should, it’s easy to check these statements and keep abreast of how your employees are spending the company dime.
Regarding employee use of business credit cards, Daniel Kehrer, Special for the ABG, recommends you set spending limits. Merchant category codes can help with this by limiting how employees can use the card. “For example, American Express offers MCC blocking for hundreds of standard codes, as well as those you define. By using this feature, business owners can allow employees to spend only with merchants in specified categories,” he says. “You even can restrict spending to specific merchants or locations by using Preferred Supplier Lists.”
AVOID CHARGING CAPITAL EXPENSES
Business credit cards can give you access to quick capital for one-off expenses, but be cautious when taking this route. If your card comes attached to a line of credit, you can use it as a stop-gap mechanism to cover a brief cash shortfall, but be aware that interest rates tend to be high.
Often, it might be better for your business to get a loan for capital expenses. Alternative lenders generally offer longer-term loans and accept a myriad of different payment methods, which make these loans an attractive option rather than charging these one-off expenses.
The bottom line is: If you apply the same discipline and responsibility to credit card management as you do the rest of your business, you should be in good shape to not only sustain your business, but to grow and continue to be profitable.