Credit cards can be a small business owner's best friend, but only if you don't make too many financial mistakes with them.
It can be easier to get a credit card than a loan in today's economy for a new or struggling business, but both financing options have risks. When it comes to a loan, the lender wants you to pay on time so they make an effort to help you understand the risks and benefits. But credit card companies often profit more if you don't understand the rules.
Avoiding common mistakes can be the difference between your credit card being a burden or a benefit. Below are some of the most common mistakes businesses make when they get a company card:
- Ignoring your personal credit. When small business owners get a credit card for their business, it's not just the business' credit history that gets checked. Credit card companies are also checking your personal credit history, and it's especially important if your business doesn't have much credit history. Keeping your own credit clean is important too.
- Failing to research best deals. Just like with personal credit cards, business cards also offer different interest rates, rewards deals, and other benefits. Don't just take the first card offered in the mail. Research the one that works best for your business so that you get a benefit every time you use your credit card.
- Paying interest. Often credit cards, for business and personal use, will have a special introductory APR with little or no interest for a year. For big purchases that will take several months to pay down, try to use a card in that introductory phase to avoid paying interest.
- Not reading the fine print. It's true that using "0% APR" cards can be good for your business (see No. 3), but not if late payments will send your interest rate skyrocketing. Always check the fine print that tells you the terms for changing interest rates, the consequences for late payments, and the conditions that could affect how you use the card.
- Having an unbalanced credit-to-debt ratio. Using your card is a good way to build up a credit history, but spending too much will hurt you. Creditors and lenders look at your credit-to-debt ratio, a balance of how much you spend versus your credit limit. Routinely maxing out your cards sends a signal that financial trouble is near, so avoid that to keep your company's credit looking good.
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- 7 Credit-Card Blunders That Could Hurt Any Small Business (Terra)
- Options When You Can't Pay Your Business Debts (FindLaw)
- Should You Finance Your Small Biz with a Credit Card? (FindLaw's Free Enterprise)