Like many founders of startup companies, Scott Yates didn't have
a line of credit from a bank to smooth out financial bumps when he
launched MyTrafficNews.com in Denver in 2001 to help commuters stay
aware of driving conditions.
So Yates sometimes tapped his credit cards to cover routine
office expenses and tackle more urgent situations -- such as making
payroll when a client was late sending in a check. "At the maximum,
I had maybe $20,000 in debt," says Yates, who built the company's
revenues to about $250,000. He sold the company to Traffic.com in
2006.
Many business owners, like Yates, see credit card financing as a
tool that can be handy in the right circumstances. In its 2011
Year-End Economic Report, the National Small Business Association
found that about 33 percent of small businesses had used credit
card financing in the past 12 months to meet their capital needs.
Credit cards ranked the third most commonly used source of capital
financing, behind only bank loans and the earnings of the
business.
Figuring out when it makes sense to use credit cards in your
business -- and how best to use them -- can be confusing.
Loading up on debt when a business is young can choke cash flow
later, says Xavier Epps, owner of XNE Financial Advising in
Woodbridge, Va., whose clients include small businesses. Borrowing
to pay the bills at a money-losing business is not a great
idea.
"The owner may need to take a step back, look at the overall
operations of a business and consider restructuring, if necessary,
to get the business close to break-even before utilizing credit
card financing for purchases," Epps says.
But in many instances, credit card financing does make sense,
say experts and small-business owners. Yates -- a serial
entrepreneur who turned to equity financing from private investors
for BlogMutt.com, a blog-writing service he co-founded in 2010 --
says he still sees credit card financing as valuable because it's
so easy to use.
"It takes a lot of time to raise money from investors," he says.
"It doesn't take that much time to fill out a credit card
application." In retrospect, he says, using credit cards made him
hyperfocused on achieving the cash flow he needed to stay current
on them.
Keeping your card choice business, not personal
While many business owners initially use personal credit cards to
finance a business, it's better in the long run to secure a
business credit card -- perhaps from the bank where you have a
business checking account, says Rohit Arora, CEO of the online loan
broker Biz2Credit, based in New York City. For one thing, doing so
can protect your individual credit rating by helping you to avoid
maxing out your personal cards.
Also, business and personal accounts are not directly linked --
although card issuers commonly consider a small-business owner's
personal credit in the application process. "If you are using a
business card, unless you default, it doesn't show up on your
personal balance," he says. Which means a high credit-to-debt ratio
on your business card, for instance, won't affect your personal
credit score -- but it will affect your business's score.
So be smart. Arora notes that if you use your business credit
cards for recurring personal expenses such as utility bills (while
keeping card balances in check) it can help you improve your
business's credit score as well as help you keep more cash on
hand.
Tracking expenses
Business credit cards can also help you easily keep track of your
business expenses -- which both you and the Internal Revenue
Service will appreciate at tax time. Don't forget to deduct the
credit card interest that applies to business-related expenses,
says Bruce Givner, a Los Angeles tax attorney who advises
small business owners and wealthy individuals.
"I have a client who runs restaurants that do $10 million in
sales a year and force their vendors to take credit cards for
everything," he says. "They pay for food, linens, silverware." The
restaurateur comes away with a nice tax deduction -- and a lot of
rewards points, he notes. The amount you can deduct depends
on your tax bracket, he says.
Another upshot of possessing a business credit card is that it
may help you get a bank loan during your company's early months --
a traditionally daunting task. "You don't have a shot of
getting a bank line of credit for your business for 18 months to
two years," says Arora, whose firm matches businesses seeking loans
with banks or other lenders.
But showing you've used your business card wisely, month after
month, can be a good way to build up your business's credit rating
with Dun & Bradstreet, trackers of business credit ratings.
Then, armed with records of paying your business credit card bills
on time, you'll be able to make a better case for yourself when you
eventually apply for a small business loan. "When you go to apply
for a loan, a banker looks at how you handle your business
debts," says Arora.
This is especially critical at a time when bank loans to small
businesses of any age are hard to come by: The Biz2Credit Small
Business Lending Index in July 2012 showed big banks approving only
11.3 percent of loans to small businesses, while small banks
approved fewer than half at 47.4 percent. The index looks at data
from 1,000 business applications made through the website.
The credit card solution still carries cautions
Of course, business credit cards are far from a perfect solution to
a business's financing needs. The Credit Card Accountability,
Responsibility and Disclosure Act of 2009 (aka the CARD Act )
brought protections to personal credit card holders from sudden
hikes in interest rates and other practices deemed unfair -- but it
exempted business credit cards. In addition, business owners
often must sign personal guarantees for their business credit cards
-- meaning they still owe the debts personally if their companies
fail.
And it's important to shop around for the best interest rates,
say experts. "The biggest mistake I've seen is that people are not
really careful about the interest rates," says Lena Rizkallah, who
advises small business owners and other clients about financial
matters at Money Moxie, based in New York City. She points out that
business cards often will offer better rates than personal cards.
(Compare today's credit card rates.)
Using business cards right
Finally, you'll want to make sure you use credit cards for the
right types of purchases. For instance, it's not a good idea to use
credit cards to finance large equipment because they'll often
devour a lot of your available credit. "For big-ticket items, you
can get low-cost financing very quickly," says Arora.
But credit cards can come in handy when you need to make a
short-term financial outlay and expect it to be recovered quickly.
"If you're a consultant, you may want to use credit cards for
travel costs, knowing you're going to get your expenses back from a
client in 30 days," says Rizkallah.
Similarly, if you run a construction firm and need to spend
money to hire a subcontractor before you get paid, credit cards may
help you stay current with your vendors until that happens, she
notes. They can also help you to take advantage of opportunities
that might be hard to pursue without additional capital -- a
key to keeping your company growing.
"A credit card for some items and a line of credit could be what
a business owner needs to go for it," says Rizkallah.