Business Credit Cards | Business Financing

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Business Credit Cards - Business Financing

Businesses make tons purchases each and every day. But, what is the best way to handle (manage) those purchases as well as finance them. Business Credit Card might be the answer.

Table of Contents

Overview: Business Credit Cards:
How To Qualify:
How To Manage For Success:
Pros and Cons:

Overview: Business Credit Cards:

Business Credit Cards are probably the most used method of small business financing. And, not just business credit cards - many small or new businesses who can't qualify for a business credit card may end up using personal credit cards in their stead.

Business credit cards are essentially revolving lines of credit. Your credit card company provides you or your business a credit limit - then, you have the ability to draw on that line up to that credit amount. Then, can pay down that limit and draw it up again.

However, unlike standard lines of credit that may have very short terms - like under a year or that must be zeroed out at least once a year, business credit cards can have an un-specified term.

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How To Qualify For A Business Credit Card:

Credit card providers, just like any lender, want to get paid back. Thus, they want to ensure that you have:

The willingness to repay - usually shown by your credit history. Have you repaid or are you repaying your other creditors as agreed?
The ability to repay - do you have the cash flow to meet the demands of your stated credit limit or will making minimum monthly payments put too high a burden on your current level of income?

Most lenders will not only require that you provide and confirm the level of income your business makes but also how much you bring in from all sources. The reason is that you will, most likely, be required to sign a personal guarantee on your business credit card. And, while this may not look like your standard personal guarantee, it will be in the fine print somewhere.

Thus, should your business fail, the credit card company can turn to your personal income for repayment.

Most all credit card providers will pull both your personal credit and your business credit if you have any. Again, they will use all methods that they can to ensure that you will repay them. And, since you will be required to agree to a personal guarantee, they will pull your personal credit as a way to check your personal payment history.

Just remember, that these are unsecured lines of credit giving the lender no other recourse but your word that you will repay. And as such, given that these lenders want to be paid back, will not take their approvals lightly.

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How To Manage For Success:

Business credit cards are short-term financing vehicles. This means that they should only be used for short-term needs, like inventory or supplies for your operating cycle or for daily small purchases like office supplies or even to pay your office needs like internet access, phone, etc - items that you would usually just write a check for.

Being a short term financing vehicle means that these lines of credit are priced as such - high interest rates, high fees and limited reward options. But, mostly due to the high interest rates, they should never be used to finance long-term assets - like machinery or office equipment.

While it may be OK to put long-term assets on your business credit card - it should only be used in those instances where pulling out your plastic is easier than writing a check - especially when away from the office or making online or by phone purchases.

Which brings up another secret to proper business credit card management. Almost all purchases placed on these cards should be done only if you or your business actually has the cash to pay for them.

Example: You need office supplies and your purchases add up to $550. Now, you have the cash in your bank account to buy these supplies out right but decide to delay your payment by using your plastic. You get your supplies and then when the bill comes due - usually after your billing cycle and a grace period, you pay off your card.

What this does is delays your payment - keeping money in your bank account or in your business for a few more weeks (think time value of money) and, if your card offers rewards, you rack up those rewards.

Further, since you pay off your balance each month you do not pay any interest - savings for your business and reducing your overall operating expense.

Now, if used for long-term assets (purchases that cannot be immediately paid off), not only will your business face higher expenses (high interest charges) but may significantly reduce its ability to obtain other outside capital when needed due to a strain on cash flow and high debt-to-income ratios.

The only exception is should a payment need to be delayed a month or two and the benefits of such a delay (the potential income or not losing a sale) outweigh the costs - then it might be justified - provided it is, again, for a short period.

Too many businesses tend to finance long-term purchases with their business credit cards (usually the only financing they can get) and find themselves out of business or in bankruptcy court due to mis-management.

Lastly, credit cards can help your business organize purchases - categorizing them as well as allowing you to make financial decisions based on how much your business spends on those categories.

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Pros and Cons of Business Credit Cards:

Pro: Might be the only financing vehicle your business can get - right now.

Con: High, very high interest rates. Further, some cards come with annual fees which can add unnecessary expense.

Pro: Delaying payment until after your billing cycle and grace period - keeping more money in your business longer.

Con: Limited uses for short-term financing only. Cannot be used to meet payroll or buy long-term assets.

Pro: Unsecured - thus no collateral involved.

Con: Unlike personal credit cards which nearly all of us are inundated with, business credit cards are hard to qualify for.

Pro: Business credit cards can offer many ways to manage your employee's purchases. Depending on your business, you could easily find efficiencies by allowing your employees to make independent purchases on your behalf or when they are out in the field. While this could speed up your processes and better satisfy your customers, it could also open you up to additional liabilities like bad purchases or employees gone wild - with your credit card. Many business credit card companies offer free or low cost cards for your employees. Not only can you limit the credit amount on these cards, but you can also limit where these employees can use them - like keeping them out of adult stores.

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