How to dig out of business card debt
Award-winning writer covering consumer and small-business credit cards.
Did the balance on that business credit card you got to furnish your office or buy plane tickets to a conference quickly get out of control? Knowing your options and taking quick action can get your business back in the black.
In fact, some small-business owners have been able to pull their companies out of credit card debt by tapping their own creativity to cut costs or boost revenue.
That was the case for GreenPal, a company that connects customers with lawn care service providers. After using plastic to finance startup costs, company owners found themselves facing a burgeoning balance of over $100,000, says company co-founder Zach Hendrix.
Business expenses were too high, so the company owners continued pulling out the card to make up shortfalls while paying too little toward the balance each month, Hendrix says. With an 18 percent interest rate on the card, the debt snowballed. “We didn’t see any end in sight,” he says.
Ultimately, the business used “out-of-the-box” thinking to cut costs, allowing the company leaders to zero out their balance in June 2017 (more on that later). Now they put $20,000 to $30,000 a month on credit cards, but pay the balance in full each month to avoid interest.
However, business owners who don’t see such a clear way out of credit card debt have a variety of options for getting help, including a new small-business financial counseling and education program, lowering expenses, refinancing or even bankruptcy as a way to restructure your debt.
Business vs. personal credit card debt
A business credit card can offer a way to separate business and personal finances, get rewarded for buying office supplies and even act as a lifesaver to keep your business afloat.
About half of small-business owners have a business card, and almost one-third of small-business owners (29 percent) say they used credit cards to meet capital needs in the past year, according to the 2017 Mid-Year Economic Report from the National Small Business Association.
“Credit cards are often the fastest and easiest source of funding for small businesses,” says Gerri Detweiler, education director for Nav.com, which provides business owners with free business and personal credit scores and helps match them to financing.
But some small-business owners start spending without a clear understanding of the risks and how carrying a balance on a business card differs from doing so on a personal card. One major distinction is that business credit cards are not covered by the Credit CARD Act, a federal law that protects consumers from certain types of credit card “gotchas,” including interest rate hikes at any time and for any reason, Detweiler says.
“Business card issuers have discretion in how they set their terms and conditions,” she says, adding that some, but not all, issuers have adopted practices similar to those outlined in the CARD Act on their business credit cards.
So, what does that mean for a small-business owner? If you have a lot of credit card debt, your card issuer might up your interest rate on your existing balance, making it even tougher to get out of debt.
How to manage business credit card debt
If you find yourself with a big balance on a business credit card, follow this road map to better financial ground:
1. Keep your accounts current
Make at least the minimum payment each month to avoid getting dinged with late payment fees or triggering default. Keeping your accounts in good standing buys you time to explore your options while avoiding damage to both your business and your personal credit.
The way you manage your business credit card account likely will affect your business credit scores because most issuers report to at least one major commercial credit reporting agency, Detweiler says. And a hit to your business credit scores could make it harder to refinance your credit card debt or get capital for other business endeavors.
What many small-business owners don’t realize is their personal credit also might be at risk. While most issuers don’t report a business card on your personal credit when the account is in good standing, some do report negative information to one or more of the three major consumer credit bureaus.
“I’ve talked to small-business owners who say, ‘It’s not on my personal credit, so I’m going to put it on the back burner,” Detweiler says. “Well, if you don’t pay, it’s probably going to be on your personal credit in 60 to 90 days.”
Business credit cards also almost always carry a personal guarantee, which means you’re personally responsible for paying back the balance, she says. That means the issuer might go after your personal income or assets to collect if you become seriously delinquent.
2. Weigh your options
Fortunately, there are several ways to deal with your business debt, depending on your situation. For example:
Just like a consumer who skips Starbucks and starts a side gig on weekends to earn some coin, a small-business owner can brainstorm ways to pay down credit card debt by lowering expenses and increasing revenue.
For example, Hendrix of GreenPal, says he “came up with a pretty cool plan.” He gathered his team and offered a “bounty” to anyone who came up with an effective, practical, cost-savings initiative. Any employee whose idea worked got a bonus of 25 percent of the money saved in the first year.
As a result, GreenPal switched from company cellphones to a monthly phone allowance of $100 a person, which saved hundreds of dollars a month. The company canceled water jug delivery and installed a cheaper tap water filtration system. And they learned coding to save on web developer fees.
Other options for lowering business costs include: bartering with other businesses, buying used equipment and hiring your kids. And one quick way to bring in funds is to collect what you’re owed, says Detweiler, who points to stats that show 81 percent of small-business invoices are 30 days past due. “You might have to get on the phone or hire an attorney to write some letters,” she says.
- Refinance your debt.
Another possibility is to get a business debt consolidation loan from a bank, credit union or online lender, which could work if your business credit is good.
The U.S. Small Business Administration offers an SBA lender match tool.
Consider looking into a loan from a Community Development Financial Institution (CDFI), a “mission-driven” financial institution that has been certified by the U.S. Department of Treasury’s CDFI Fund.
“Their mandate is to deliver fair capital to underserved segments, but that’s a pretty broad definition,” says Catherine Berman, CEO of CNote, a company that partners with CDFIs. That broad definition could include woman- or minority-owned businesses or enterprises in low-income areas, she says.
“You may be surprised to find you qualify,” she says.
Many CDFIs offer loans to refinance high-interest debt, and they also offer pre- and post-loan business coaching. You can find a local CDFI office using its locator tool.
One word of caution, though: “If you go the debt consolidation pathway, it can feel a bit like a clean slate,” Berman says. So you want to commit to repayment as quickly as possible and refrain from using new revenue to spend more, she says.
As a last resort, a small-business owner drowning in debt might get a free consultation with a bankruptcy attorney to find out if this route makes sense.
“The attorney may be able to help you restructure your debt,” Detweiler says. “Keep in mind that most small-business credit cards are personally guaranteed and wiping them out in bankruptcy may require you to file for personal bankruptcy as well.”
However, your attorney will be able to offer you advice and information specific to your situation.
3. Seeking help for business credit card debt
If you’re having a hard time deciding which route to go, it’s time to seek advice and coaching.
For starters, business owners can seek help from the new NFCC small-business program, which is designed to help small-business owners get an overview of their overall financial picture, including areas where their business and personal finances overlap, says Bruce McClary, vice president of communications for the NFCC.
The NFCC is a nonprofit credit counseling service. The counselor can walk you through all your options and help you create an action plan. However, unlike consumer credit card debt, business credit card debt is not eligible for a debt management plan, McClary says.
As you talk through your situation, it’s important to analyze how you got into debt, so you can avoid a repeat in the future, Berman says. For example, many business owners make overly optimistic revenue projections or fail to plan for bumps in the road, both of which can result in debt, she says.
Finally, be aware of the cons of business credit cards and be careful how you use them for financing going forward. “You want to make sure you’re not in this position again at the same time next year,” Berman says.
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