Pros and Cons of a Credit Card for Small Business
As a small business owner, you may be debating the pros and cons of a credit card for small business. You may wonder if you need a credit card in the name of your business or if it would easier to use your personal credit cards instead.
Opening your own business is exciting. You are full of plans and ideas and optimism and it's difficult to imagine your business as anything less than a success. Realistically, a great majority of small business fail within the first three years of operation.
The most common reason for failure of a small business is not that the business idea was not valid or the plan was not a good one. The reason most often stated is that cash flow for the business was not sufficient. Many owners of new business have bankrupted themselves personally trying to keep their business afloat financially. That is the worst scenario you can imagine as small business owner and one that you can plan to avoid.
If your business has established no credit in the business name, you may have no choice but to guarantee payment personally of your first credit card for your small business. If that is necessary you should do everything possible to build the credit of your business to a level where you can remove yourself from personal liability for business activities.
The Pros of a Credit Card For Small Business
Easier Qualification: A revolving credit card account is often easier to qualify for than a line of credit at a bank or a startup loan. If you apply at your local bank where you and your business are known, you will need less credit established to apply for a business credit card.
Ease of Use: There is no arguing the convenience of using credit cards both for purchases and as a way to track business expenditures.
Online Convenience: Buying products and paying bills online are easy when using a business credit card. Whether paying for stock to be delivered to your store or paying the plumber who fixed the employee restroom, tracking those charges is easy when a credit card for small business is used for payment.
Special Deals and Bonuses: If you take a line of credit or a business loan from your bank, the only bonus you get may be a payment book. Comparing credit card offers for small businesses allows you to apply for a card that awards air miles, gives discounts on car rentals and hotel rooms, or even pays you a percentage of cash back for charges made to the card.
Managing Business Finances: Business owners know to save receipts for everything they buy. However, although you need those receipts for tax purposes, it can be hard to track expenses using only little pieces of paper that are easily scattered or lost.
Lenders providing small business credit cards also offer free tools that can help you keep your business financially sound. You can set alerts with some lenders to send you an email every time an employee makes a charge or when a payment is due.
You can set up categories of purchases and sort all charges by those categories so you know exactly how much you spent for utilities and printing and travel without hours of sorting through receipt records. You can set up a report that will list how much you paid to each supplier so far this month and then easily compare it to expenditures of previous months.
The Cons of a Small Business Credit Card
Cost of Use: There is a price for convenience. The interest rate of a credit card for small business is several percentage points higher than the APR of a fixed line of credit or a bank loan. With careful management, you can limit those costs by paying the amount due each month in full and by avoiding fees for late payments or charges made over the limit for the account.
Security Precautions: Employees authorized to use the business credit account need to be screened and trusted. Their charges should be monitored on a regular basis to avoid abuse. Business owners should be cautious when giving out credit card information online just as they are cautious with personal credit cards.
Changing Interest Rates: Most banks loans and credit lines have traditionally carried fixed rates of interest. This is still true for bank loans but increasingly today credit lines have adjustable interest rates. However, those rates are based on a trackable T-Bill or other index and will not fluctuate widely.
Small business credit cards do not offer the protection extended recently to personal credit accounts that limits changes allowed in interest rates. Late payments or any use the lender considers irresponsible can result in a significant increase of the APR of your small business credit card.
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