Almost every modern company runs on some form of credit these days. Even the most profitable businesses benefit from having a line of credit available for emergencies, well-planned purchases for perks, or improving their credit score. According to the Small Business Administration, 65 percent of small businesses rely on credit cards, but just 50 percent use business cards in the name of their company. This strategy can potentially harm a business owner’s personal credit, and it limits the opportunities to get business funding in the future.
If a business credit card is the wiser choice, why doesn’t everyone get one? For being a very astute business move, cards have their drawbacks. Here are some of the ways that business credit cards can do more harm than good and keep you from achieving the most important growth goals.
Common Pitfalls in Business Credit Cards
High Interest Rates
While all cards carry the risk of higher interest and APR terms, business cards are more often characterized by these more expensive fees. Rates range by credit-worthiness, amount of credit available, and bank, but expect to pay much more for the ability to borrow money than you would for a traditional business loan. If you expect to pay back the money in a timely manner – or, better yet, pay it all off every 30 days – this isn’t so much a concern. The average company carries a balance from statement to statement, however, and the interest rate is a major factor in what it costs for them to access funding.
One of the best reasons to use a personal credit card for purchases is the amazing protection plans that some offer. Full replacement of an item within 30 days or an extended manufacturer’s warranty are just two of the most common perks for placing a purchase on a personal card. Business credit cards, however, aren’t as likely to give you this benefit. Because they assume that you’ll be making purchases to buy inventory or infrastructure for a profit, they purposely exempt these products from extended protections. Other cards don’t offer protections, at all. While there may be a few high-end cards that, for an additional fee, can give businesses some purchase protection, this is rare. Do your research before assuming that it’s standard.
Personal Credit Risk
If you thought that you could apply for business credit card and keep your personal matters completely out of it, think again. Not only will your personal credit score be a factor in qualifying for most business cards, reporting agencies usually tie your performance directly to your personal credit score and history. It’s a catch-22 that many business owners don’t carefully consider. You need good personal credit to get a business card, and you need to pay that card promptly to keep your personal credit pristine. Failure to pay a business card means your personal assets are in danger. Adding a business card is a big risk, although it can pay off if managed appropriately.
Business owners aren’t the only people who use credit cards for their company endeavors. Purchasing managers, sales teams, and anyone involved in acquiring inventory or assets for your business will need to use your card accounts for their daily activities. Giving each employee their own card is vital, but this isn’t a guarantee that they will do right with it. Employee fraud and misuse happen at an alarming rate. When it does happen, companies with fewer than 100 employees experience an average of $147,000 in losses due to fraud, and small businesses—in particular—experience a higher rate of fraud than larger companies. An astounding 38 percent of fraud cases were attributed to the smallest companies! Fraud isn’t just limited to those in bookkeeping (although that department can have its lemons); any employee with access to a card must be subject to a system of checks and balances to ensure they aren’t skimming from the company through expensive reimbursement schemes or other forms of fraud.
Limited Lending Opportunities
When you have extended your credit through credit card use, it can be hard to acquire new credit in any form, and credit card utilization methods become very important. Charging up over 25-30% of any one business credit card can lead banks to believe that you are needy, unable to pay off debt, or are reliant on credit to continue. Even if this isn’t true, keeping credit usage high will lower your business score (and possibly your personal score) and tell lenders that you’re not a good credit risk. If you’re aiming for a big, traditional business loan in the future, opening and spending on a business credit card can derail those plans. If you do use a business credit card, pay it off each month or keep that utilization number low to keep your future lending options open and affordable.
Despite all the negatives mentioned about business credit cards, they are still a useful tool in the small company’s financial toolkit. They have a place, and –if used appropriately—can even put you in a position to raise your credit score, prove you’re reliable, and get access to bigger, better funding opportunities down the road. In short, there’s nothing inherently bad about business credit cards. What’s potentially bad is how you use them.
Like any business financial opportunity, use your research and take time in deciding which card is right for you. Put limits in place for spending, and have a plan of action for repayment in an appropriate and timely manner. Take extra measures to keep business credit card account numbers secure and cardholders accountable for their charges. If done well, the business credit card can be an amazing opportunity to build a little cushion in your budgets and grow your company to a new level in the new year.
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