If you are the owner of a small business, chances are you've been receiving offers by credit card companies and their affiliates encouraging you to open a business credit account. Credit card usage is once again on the rise, and banks have much to gain by targeting the one category of credit cards that flew under the radar in the 2009 credit reform legislation. But before you push that business credit card offer aside, you might want to reconsider.
Business credit cards are more than just a necessary evil. When used responsibly, they are often the most cost-effective choice for short-term business financing. In this article, we'll look at four key areas typically associated with business credit cards and provide a little clarity on the ways they can have a positive impact on your business as well as how you can avoid some of the potential pitfalls.
Building Your Business Credit
Even if you are a bit reluctant to take on a credit card for your business, you may want to use one anyway to help build up your business' credit profile. Just as making regular monthly payments on your personal credit card bill improves your personal credit score and increases your creditworthiness, by regularly using and paying off a business credit card, you can help ensure that your company will be able to borrow capital to expand or handle emergencies in the future. Without any credit history, your business will have a hard time obtaining future loans and other financing from banks or commercial lenders.
Building a solid credit profile will also help you to attract outside investors and business partners. This will be particularly important if you plan on selling your business, expanding it, or attracting business in a constantly changing sea of foreign markets. Many countries, including Britain, Japan, China, and even growth economies, such as India, are on the look out for US-based businesses to invest in (even in this economy).
But just a few things you should keep in mind when trying to build your credit profile via credit cards: You should make an effort to use a significant amount of your available credit each month to help avoid getting your credit limit cut. You could, for example, use your card to pay for some reoccurring overhead expenses. Also, make sure that your business credit card is actually reporting information to your business' credit profile at one or more credit bureaus and pay attention to how this information affects your personal credit report (see below).
Earning Business Rewards
One of the ways credit card companies encourage small business owners to open new accounts is to offer rewards and money-saving opportunities. Not all reward packages are created equal, however, so make sure you do your homework. There are several sites that provide business credit card comparisons and reviews. For starters, you could take a look at Nerdwallet and Bankrate.com.
Compare rewards programs with the specific needs of your business – where do you spend the most money, and where could you use a break? Whether it's for travel, office supplies, or anything else, you can probably find a card that will offer a discount on those purchases. Make sure the interest rates and annual fees still make the card a frugal, cost-effective decision before you sign up.
Simplifying Record-Keeping and Employee Expense Tracking
In the early days of a business' development, it is common among small business owners and entrepreneurs to rely on their personal credit cards for business expenses. Not only does this create confusion, but it can actually cost your business some money.
Having a business credit card simplifies bookkeeping by creating a separate account for your business expenses that is not connected to your personal accounts. With your accounts separated, itemizing business expenses becomes as easy as looking at your monthly credit card statements. You can also give business credit cards to some or all employees and avoid time-consuming reimbursements.
Moreover, using a business credit card can help you come tax time. When you use a personal card for business expenses, you generally cannot write off amounts like interest for tax purposes. As such, you end up paying more taxes than you need to.
Remember With a Default... It's Not Just Ugly, It's Personal
Business credit cards can be a great short-term financing tool, and can help to increase your business' flexibility as well as save you money by allowing for impromptu, cost-effective purchases, such as taking advantage of a vendor's special offer or discount.
One of the major benefits of business credit cards is that you can usually get a much higher credit limit than with a personal card. However, these higher limits are not a permission slip for spending more than you need. Just like with any other form of credit, business credit cards can be a slippery slope for managers who over-spend or who don't pay off balances.
And that's where countless small business owners get themselves into some hot water. Many business owners are unaware that their business credit cards are little more than glorified personal credit cards. Not only are the business owners with these accounts being held personally liable for the debt incurred, but all transactions are reported on their personal credit profiles, and their personal debt-to-credit limit ratios are affected.
That said, make sure to ease into using your business credit card, especially in the early days when capital is less readily at hand. While a business credit card may be the frugal choice for covering your temporary cash shortfalls, some major expenses or purchases may be too risky to put on your card. In this case, seek out alternatives, such as microloans or vendor financing.
This post was written by the Frugal Dad. FrugalDad.com offers coupons and deals for top retailers, including Finishline.com coupons.