He was trying to remain upbeat, but it was clear the entrepreneur I was talking with was worried. He had multiple business credit cards with high balances as a result of trying to get his business off the ground. He knew when he took on the debt that he’d have to hustle to pay it back, and he was working as hard as he could to make his business a success. But for several months now, he was only able to make minimum monthly payments, and didn’t know how much longer he could keep doing even that. “What can I do?” he asked.
For entrepreneurs, credit cards can be more than a convenient way to pay for purchases. For some, they become a lifeline, providing their business with flexibility to borrow quickly when needed without the scrutiny of a traditional lender.
According to a research report by Mercator Advisory Group, half of small businesses who use business credit cards tend to borrow on them, and one in four who regularly do so.
But what happens when your business credit card balances keep going up— and you can’t figure out how you’re doing to pay them down?
“One of the keys in business is to have the liquidity to deal with the unexpected,” says R. Shawn McBride, attorney, CPA, and co-host of The Financial Transactions of the Future Economy show and podcast. “Lots of unexpected things can happen in a business: a customer could disappear, a star salesperson could leave, a new competitor could show up or a natural disaster could strike – just to name a few. In most cases, you can think of your business credit card as an emergency fund. But if you maxed out that emergency money you might find yourself in a very bad position when the expenses of an expected situation happens.”
Bruce McClary, vice president of communications with the National Foundation for Credit Counseling (NFCC) agrees: “Leaving yourself with less room to charge expenses on your credit card could put some of your business activity on hold. This might interfere with deadlines and growth opportunities and may also have an impact on the overall performance of your business.”
Michael Bovee, co-founder and debt expert at Hello Resolve Inc., a free financial management platform that helps individuals in financial distress, says he’s getting more calls lately from business owners looking for advice about their credit card debt. “They have business credit cards that they have personally guaranteed that they can no longer continue to pay, or that they have already fallen behind with,” he explains. “They are looking for solutions that will help them stay afloat and continue operations, or how to resolve debts as they wind down a business.”
One sign of trouble may be when your credit scores start to drift down. Credit scores compare your balances with your credit limits and typically penalize consumers with high balances in comparison to their limits. If you’ve used personal credit cards for your business, and your balances creep up, you may get an alert from your credit monitoring service that your credit scores are going down due to this “debt usage” or “utilization” ratio. As your credit scores decline, your ability to qualify for other funding will often narrow.
If you primarily use business credit cards, though, you may not get this warning signal. That’s because many business credit cards don’t report to personal credit. Instead, they report primarily to business credit reports, which traditionally don’t include credit limits. (Here’s a list of when business credit cards report to personal credit.)
In that sense, using the right business credit cards can insulate your personal credit from balances you incur for business purchases. It can give you more breathing room as well, since you still may be able to leverage good personal credit scores to consolidate using other types of financing.
But almost all business credit cards report defaults to the owner’s personal credit. That means if you start falling behind on payments, you may see these accounts suddenly appear on your credit reports with notations of late payments.
Another warning sign? Issuers are lowering your credit limits, raising your interest rates or both. Most business credit cards carry a steep “penalty” interest rate. Pay late and you can trigger an interest rate hike on your balance to 25% or more. Some issuers have penalty rates that can go as high as 29.99%.
Where Do I Go From Here?
If you are concerned about high business credit card balances, here are options to consider:
1. Look For Lower Rates
When you get a lower interest rate on a credit card or loan, a larger portion of your payment goes toward your balance, rather than interest. “You might want to consider a transferring the balance to a card that offers an interest-free introductory period or one with a more affordable long-term rate,” McClary suggests.
If you have any cards with a substantial amount of available credit, check into a lower rate if you transfer a balance from another card. Or, if your personal credit scores are good, shop for a new credit card with a zero percent balance transfer offer. You may also want to check into other types of small business financing that will allow you to consolidate debt.
Tempted to tell your card issuer you need a lower rate because you are having trouble keeping up with your payments? Think twice. Doing so could prompt an account review that may result in your credit limit being lowered— or even get your account closed.
2. Focus On Your Business
If you’re struggling with credit card debt, the problem may lie within your business itself. Expenses may be too high, revenue too low, or a combination of both. “If you can’t pay down the cards it is a good sign to look at your business and figure out what is wrong with the core business plan,” McBride advises.
If you don’t have a business mentor or coach, consider getting one. An outside perspective may help you identify unprofitable areas of your business you need to cut, or opportunities you’re not fully taking advantage of. Ask your accounting professional or business network for recommendations, and take advantage of free help available through Small Business Development Centers and SCORE.
3. Get Debt Help
If it’s just not possible to pay back what you owe, business debt settlement may be an option. “Business credit card debt can often be settled for less than what you owe, which is a good option when you have fallen behind with payments and are trying to avoid business or personal bankruptcy, or a creditor suing you,” says Bovee. (Hello Resolve Inc. provides referrals to debt settlement providers along with other options.)
Financial counseling may be another way to explore options. “It can help to speak with a nonprofit agency that offers financial coaching for small business owners, such as an agency affiliated with the National Foundation for Credit Counseling,” says McClary.
It’s important to remember that small business credit cards typically require a personal guarantee. That means that if you default, the issuer may try to collect from you personally, putting your personal assets at risk. If you’re worried about personal liability, it’s also wise to consult a bankruptcy attorney. At a minimum, the attorney can help you evaluate the risk.
The takeaway here isn’t that business credit cards should be avoided at all costs.
“Credit cards shouldn’t be feared,” McBride notes. “They are a tool in your business. Used correctly they can help you grow and manage cash-flow issues. Used incorrectly and they can harm your business and even your chances of survival as a business.”
Carrying balances for short periods of time “due to seasonality, losing a contract, or something that is clearly going to be short lived… no problem,” Bovee says. But if you find yourself struggling month after month, reach out for help.
This article was originally written on November 21, 2018 and updated on December 10, 2020.