You need funding to get your small business off the ground and it seems like the only way to get it is through the use of a small business credit card. You are certain that once you have that card and begin using it that all your business problems will just magically go away.
It’s true that a lot of great businesses that we know today were funded on credit cards but we hardly hear the stories of businesses that did not make it. We never hear of the businesses that left the owners in a heap of debt. Small business credit cards do have their place and can be useful but in the wrong hands these same cards can be detrimental to a business owner. It can lead to bankruptcy and ruined credit. Here are a few traps to avoid if you decide to get a small business credit card.
Temptation to Spend More
With a line of credit readily available there would be an increased temptation to purchase more and more for the “business.” While some of the purchases might be legitimate purchases others may be impulse purchases of things that there is no immediate need for in the business. Keep in mind that whatever you charge you must repay and it will include interest charges with it so resist the temptation to overspend.
High Interest Rates
Small business credit cards, especially reward credit cards do come with high interest rates. Some cards even carry rates that are much higher than consumer credit cards. If you do not plan to pay off your balance monthly then be extra careful with your purchases. The interest that your balance attracts could really reduce your business profits if you don’t use the card wisely.
Credit History Linking
When you sign the contract for a small business credit card you agree to a personal liability clause. This clause means that you will be personally held accountable for the business debt. If for some reason your business fails and you are unable to repay the debt you can ruin your personal credit score in the process.
Increased Exposure To Fraud
Some business owners get extra business credit cards in the name of their employees so that they can conduct transactions for the business. Ideally these cards should be given only to trusted employees but the fact that the issue the card to others increases the risk of misuse and fraud. Business credit cards are not covered under the Consumer Bill of Rights as they are owned by a company and not an individual. This means that there is no option for dispute resolutions with these cards. Bottom line is that you understand the risks when you give out extra cards to employees.
Rate of Return Must Be Significant to Justify Costs
If small business credit cards will be your primary source of funding for the business you will need to ensure that the rate of return is high to justify the expense. The cost of using the credit line made available with these cards is very high and the cost to repay will significantly reduce your business profits. In fact you might be operating at a loss if you run high balances that you do not pay off before interest charges are applied.
If you must use credit cards keep the spending to what is absolutely required for the business. Balance the use of credit cards with low interest loans or loans from family and friends who are willing to invest in your dream. Use the card wisely and it will work for you.