Small business credit cards help balance capital needs
By Ben Woolsey and Emily Starbuck Gerson
The No. 1 reason that small businesses fail involves insufficient capital, and business credit cards can help smooth out the ups and downs of small business capital needs.
"Bottom line: A credit card has replaced the personal, unsecured line of credit," says Bill DeShurko, a financial planner and author of "The Naked Truth About Your Money." DeShurko says most people assume banks will lend money on good business ideas. "Reality is that banks just don’t lend without collateral and a sizeable chunk of your own money," he says. Lenders in the Small Business Administration loan guarantee program "also want to see the borrower with capital. Even buying something as ’safe’ as commercial real estate usually takes a 20 percent down payment. And it is very difficult to refi a commercial property and take cash out, even when you’re an established business."
If you are starting or running a business, DeShurko’s advice is to get as much credit as you can on credit cards — but within reason, as too much credit will make your credit score plummet. Below are several ways a credit card can benefit a small business.
Extending cash flow
For businesses that rely on consistent cash flow to pay for supplies or contractors (landscapers, hair salons, interior designers), a business credit card can aid in purchasing items from clients before invoicing customers. This way, money paid out does not need to come out of the business’s cash accounts. Once the customers have paid, the credit card bill can be paid off.
Donna Maria Coles Johnson is the founder and CEO of Indie Business Media LLC, where she advises and consults small businesses. "I have a media component to the company with print magazine and video," Johnson says. "When we need a new piece of audio equipment or new camera lens, we put it on the card during a time when we know we'll be able to work harder the next month to cover the pay off on the AmEx bill. This gives us a lot of flexibility because we can just get a few new clients that next month and work a little more to cover the expense."
If your business falls under this situation, look for a business credit card with high credit limits and benefits for paying off within 30 days. If your billing cycle to customers goes longer than 30 days, look for a low interest credit card so it won't matter as much if you carry a balance for a month or two.
Flexible credit limits
Credit limits for business credit cards come in two varieties: preset and no preset. Credit cards with preset limits are usually generous in those limits and normally carry no annual fee. Business credit cards with no preset spending limits, such as those from American Express, do carry an annual fee but offer more flexibility. If your business spending is prone to significant spikes due to inventory purchases, a credit card with no preset limits offers flexibility. If your business works primarily on a cash basis or doesn't need to purchase inventory on a regular basis, a credit card for periodic or emergency uses would be best. Look for a small business credit card that offers a moderate credit limit with a low annual percentage rate (APR). If extra money is needed, it is available for your business and can be paid out over time.
Business credit cards with rewards
Businesses that require frequent travel or client entertaining should look at business credit cards that offer reward benefits. For example, frequent flier business credit cards offer benefits both for making charges to their cards and for flying their airlines. Business spending can also be leveraged to earn significant cash back or merchandise rewards. Consult with your accountant on how these benefits can be used for either business or personal use.
Maintaining proper records is crucial for small business expense reporting and profitability analysis. Credit card statements — particularly year-end statements — can be invaluable for small businesses to monitor spending by category, report rewards and simplify tax preparation. According to Johnson, this aspect of a small business credit cards is "critical critical critical. If I had to actually plow through paper receipts or dump a file of them on my accountant every quarter, her rates would skyrocket and I'd lose my mind." Johnson says that by purchasing everything with her credit card, her accountant is able to view all of the transactions online and assess the financial health of the business. "It helps us stay on top of things that would otherwise get lost because I'm awful with paper," she says.
"Small business credit cards make a lot of sense, particularly if you need to order supplies or services over the Internet," says Jan Dahlin Geiger, a financial planner and author of "Get Your Assets in Gear! Smart Money Strategies." "While you could use a debit card for this, it is much safer to use a credit card since you are able to contest charges if you do not receive the product or service that you expected to receive." Credit cards also have zero liability for unauthorized charges, so if your credit card information falls into the wrong hands, you will be protected.
It is worth noting that small business credit cards do not benefit everyone. "Many small business owners are not on top of their financial situations, and a credit card can help them dig a mighty deep hole in a mighty short time," Geiger says. "The advice I give to clients is this: If you can't pay off your credit cards in full every month, at least 10 months out of 12, then for you they are financial poison. If that is the case, get rid of it!"
How your business chooses to use credit needs to be discussed between you and your financial adviser or accountant. Making the right choice when it comes to a business credit card can help turn your business into more of a success.
Published: December 22, 2005
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