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Previous: Follow-Up Strategies By Janet Attard In recent years, one of the easiest ways for small businesses to finance their business has been with credit cards. A business owner with a good credit history could get a business credit card with a credit limit of $10,000 to $25,000 (or sometimes more) without the hassles of applying for a bank loan or line of credit. And, if the business owner continued to pay the credit card bills on time, they could count on having credit available when they needed it at a reasonable interest rate. Now, as reported in BusinessWeek, some business owners are finding that those reasonable interest rates are suddenly skyrocketing to very unreasonable levels. One business cited in the BusinessWeek article, for instance, saw their rates jump from 11.74% to 30.99% after they were late on a couple of payments. But surprisingly, late payers aren't the only ones being hit with sky-high interest rate increases these days. Some business owners with good credit and on-time payments histories are being whacked with exorbitant interest rate increases. A business owner we know just had the interest rate on their credit card hiked from 12% to almost 23% even though they were never late on payments, always paid far more than the minimum due each month, and paid off the entire balance about once a year. When the business owner called the bank to ask for an explanation, the bank refused to give any reason for the hike. What's the solution? For some businesses, unfortunately, there won't be one. The credit squeeze coming on top of rising gas prices and economic slowdown is likely to cause some businesses to fail. But if your credit card interest rate gets jacked up 10 or 15 percent, your business is sound and your need for cash is temporary, this may be the time to hit up relatives for money - or borrow from your own personal savings - and pay off the credit card balance completely. The reason: The interest rates on CDs and money market accounts is quite low. Thus, if you borrow $10,000 from someone who might otherwise put the money in a CD earning 4%, and you paid them 12% interest on the amount you borrow, they'd make several times more income lending you the money than they would putting it in CD. And, your business will pay less interest than it would to the credit card company that's just raised your interest rate. To keep all parties - and the IRS - happy, draw up a loan agreement specifying the amount of the loan, the interest rate and the repayment schedule - then, stick to it. More: 7 Cash Flow Secrets Your Accountant Never Told You Posted by Janet Attard on August 25, 2008 at 10:06 AM | Comments (8)Comments I think the suggestions are very sound and I have myself done this, to save exorbitant increases in credit card interest rates, out of desperation, but having a proper agreement for repayment of the loan, as stated, the person that you are borrowing from is getting a better interest rate than they would otherwise and also over a shorter period of time in some cases Posted by: Lorna Dyter on August 26, 2008 at 3:10 AM Mark, As far as there being solutions other than borrowing from oneself or from family and friends, yes, for some businesses there are. There are things like traditional factoring, merchant account-based loans (ie, you get loans based on sales coming into your merchant account), and other types of financing. But for businesses that are sound and who have family or friends who are interested in loaning money (rather than investing in the business), such loans are win-win deals. The business gets the loan at a lower interest rate than the credit card is charging (and of course can write off the interest); and the lender makes more on their money than they'd make putting it into a CD. Posted by: Janet on August 26, 2008 at 10:31 AM Credit card companies are evil :) Friends are my bank system. Posted by: Smith on September 2, 2008 at 4:36 AM 2009 isn't looking good. High interest rates are a result of the CC companies trying to make back their losses from customers that defaulted on their cards. They do this mainly because they are hoping that those who are at risk of defaulting will try to move their balances to other cards with better rates. After all if these people move their balances they will get the dept paid back in full. I honestly see a depression hitting this year. All it would take is for the Chinese to stop buying our bonds and we would be screwed. Then interest rates would go through the roof, and this would cause a new wave of foreclosures. Posted by: Houston Web Design on January 12, 2009 at 2:24 AM i love your sound & informative advce. however most of this is inapplicable my country. i live in uganda where bank credit services such as those you speak of are non-existent especially for the common man. could you give us advice in line with the economic situation of LDCs vs small business. me & alot of other people who look forward to your daily postings shall be be immensely pleased. good day Posted by: nsubuga benjamin on August 20, 2010 at 8:28 AM At glance, your solution is felpful, but we must know, that the capital owners aren't stupid... in the situation, mentioned above, also the interest rate will increase from 4% to about 8%, besides why a physical person lends us money, if we aren't on-time payers? Posted by: Tornike Bakhturidze on August 21, 2010 at 2:38 PM Creditors that jack up interest rates give me an easy decision: those are the first debts to allow to go into default. The credit report is already shot, if it was not before. The creditor is demonstrating bad faith. Why should I not respond in kind? After several months, it will settle for a dime or a quarter on the dollar, and the interest rate and its phantom revenue the creditor reported in its investor calls in the meantime is a moot point, and as meaningful as its corporate statement of ethics. Posted by: Jim Graham on August 25, 2010 at 2:25 AM |
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The information compiled on this site is
Copyright 1999-2012 by Attard Communications, Inc. and by the individual authors. |
Sorry, I think the idea of borrowing money from friends or relatives
is perhaps a quick fix but does not address the real problem.
Credit card companies have been allowed to dictate their own
interest rates far in excess of anything remotely connected to the current economic financial parameters. It would have been more
informative if you would have mentioned other available
economic solutions and saving measures.
Posted by: Mark anderson on August 25, 2008 at 8:29 PM