Small business owners don’t like to admit it but far more than you might think rely on credit cards to solve short-term cash flow issues. It’s not uncommon to use credit cards to pay employees or vendors, or for emergency purchases that don’t fall into the company budget.
If you’re in the market for a new business credit card or one to replace an existing card, keep these points in mind as you shop.
Your Business Has a Credit Score
Did you know that just as you, the individual, have a credit score, your business has a score of its own? It’s called your Paydex score, which is issued by Dun & Bradstreet. Just like your personal credit score, the better your Paydex score, the more likely you are to receive business credit with more favorable terms.
Your Personal History Does Affect Your Business Credit
You may have registered your business largely to separate your business assets from your personal but especially in the case of small businesses, creditors know that your business and your personal finances are, in actually, connected at the hip.
Although you shouldn’t do it, if you’re like many business owners, you move money from your business account to your personal account as needed and sometimes purchase business items with your personal credit card. Lenders know that and that’s why you have to keep your personal finances in check if you want to qualify for a business loan.
The CARD Act Doesn’t Apply to Business Cards
The CARD Act was a sweeping piece of legislation that many said, leveled the playing field for consumers and forced credit card issuers to enact terms that were more customer-friendly. Among the changes, it ended retroactive interest rate increases, requires banks to give 45 days of notice before hiking interest rates, and other provisions widely seen as a win for consumers.
But those rules don’t apply to business cards. Card issues can and will hike your interest rate if you pay late making it imperative that you use the card responsibly. Most important, keep your balance to a minimum so you’re free to cancel the card if the issuer changes the terms.
How Do I Find a Business Credit Card?
If you know how to find a personal credit card, you’re well on your way to finding the perfect business card.
First, analyze your spending needs. Will you use it for those times when customers aren’t paying you as fast as you need to pay vendors and employees? If you need a card for relatively small expenses that are paid within a month as your cash flow increases, a rewards card may be your best choice. Because you’re paying the balance rapidly, the interest rate isn’t as important.
Then, the question to ask is, what kind of rewards card? Travel rewards? Cash back? Also look at the value of the points. For example, if the card awards you one point for every dollar spent, each point is probably worth about one cent. Look for cards with a higher payout or choices that have double or triple points for various types of purchases.
Finally, if it has an annual fee, don’t automatically say no. If the services the card offers more than makes up for the annual fee, it may still be a good value.
Many business cards come with perks like the ability to issue cards to employees with preset spending limits, expense tracking, the ability to report your activity to Dun & Bradstreet in order to build your Paydex score, airport perks like access to business lounges, and added purchase protection. Compare the features of each card only after you look at more important features like interest rate, rewards programs, and annual fees.
If you know you’ll use your card for larger purchases where you’ll pay the balance over time, the card’s interest rate becomes the critical component. Look for cards with low interest rates or if you have a balance on a previous card, a new card with an extended introductory low interest rate is your best choice.
But if your purchases will truly be large, a credit card should be your last resort. You might not be able to secure a traditional business loan at a bank but online lenders like Kabbage may offer better terms without the qualification requirements of a bank.
Just like in your personal life, credit cards can be an effective tool to solve cash flow issues in your business but taking on debt is a gamble. You’re assuming that your business will grow enough to allow you to pay the debt sometime in the future. You hope that’s the case but if it the unforeseen happens, how will you pay the debt?
A business credit card is a tool. Use it properly and sparingly.
© 2013 Attard Communications, Inc., DBA Business Know-How®. May not be reproduced, reprinted or redistributed without written permission.