More small businesses are considering using credit cards in their daily operations. With rates on the rise and lending ceilings shrinking at banks, companies should know a few things about business banking before using plastic.
The Credit Card Accountability, Responsibility, and Disclosure Act limits how much rates can go up on credit cards, along with several other important requirements to protect consumers from unfair billing or payment application methods. Unfortunately, businesses don’t benefit from the act. They’ve been seeing about a 30% hike in credit card rates since the beginning of 2010, and according to BillShrink, this is nearly double pre-CCARDA levels, with roughly a 16% average per year increase.
This is big news for small businesses already using cards as a major source of funding. The National Small Business Association’s Small Business Credit Card Survey found that almost 45 percent of small business owners have at least 10 percent of their financing on credit cards, and most of these holders agree their card terms are getting worse.
Detailed Alternative Financing Options
While credit cards can offer convenience, small businesses should also consider more stable financing options:
- Small business loans. Traditional banks or credit union loans offer lower interest rates and fixed repayment terms.
- Lines of credit. Business lines of credit provide flexibility similar to credit cards but typically come with lower rates.
- Crowdfunding. Platforms like Kickstarter or GoFundMe allow businesses to raise funds from the public in exchange for perks or equity.
- Invoice factoring. Businesses can sell outstanding invoices to factoring companies for immediate cash flow.
Exploring these alternatives can help small businesses avoid high-interest debt and maintain financial stability.
More than just that, considering financial services outside credit cards, like online banking and mobile banking, is convenient for both the owner and company, as cards don’t allow anyone but the owner to use them. According to Gwen Moran of Entrepreneur magazine, small business cards will usually be issued to an owner and will not allow other company members to use them. It also means that the owner’s credit score will be scrutinized even though it’s a business card, and issuers are looking for very high ratings before they extend credit. Moreover, even though the card will be issued for the business using the owner’s credentials, any late payments will go to the business and personal credit bureaus.
Credit Card Rewards and Benefits
Despite the drawbacks, credit cards can offer rewards that benefit small businesses.
- Cashback rewards. Many business credit cards offer cashback on everyday purchases like office supplies or fuel.
- Travel points. Frequent travelers can earn airline miles or hotel points to offset business travel expenses.
- Purchase protections. Some cards include benefits like extended warranties or purchase insurance, which can be useful for expensive business-related items.
Credit cards can offer businesses a flexible source of income in case things are tight or an owner wants to build credit. However, people should be mindful that other sources of financing exist and that credit cards, while convenient, can have significant negative backlash. As the NSBA reports, a third of businesses have reported mixed up or unreceived billing statements, another 40 percent have had their credit limits reduced, and more than half have experienced an interest rate hike. You can always have a small business credit card as a fallback, but exploring more stable financing options may be best for your business.
Impact of Credit Card Usage on Business Credit Scores
Using credit cards responsibly can help build a business’s credit score, but mismanagement can harm both business and personal credit:
- On-time payments positively impact the credit score and establish a strong credit history.
- Carrying high balances relative to the credit limit can lower the business’s credit score.
- Using cards issued specifically for the business, rather than personal credit cards, is essential for protecting personal credit.
The Importance of Reviewing Card Terms
Before applying for or using a business credit card, it is crucial to review the terms and conditions thoroughly. Start by understanding the annual percentage rate (APR), noting whether it is fixed or variable, as this affects the cost of carrying a balance. Additionally, pay attention to any associated fees, such as annual fees, late payment charges, or foreign transaction costs, which can add up and impact your bottom line.
Equally important is evaluating the rewards program to ensure it aligns with your business’s spending habits and needs. For instance, cashback on office supplies or travel points may provide tangible benefits if those categories match your expenses. By carefully reading the fine print and comparing options, business owners can avoid unexpected costs and select a credit card that complements their financial strategy.