Small business credit cards are a good option for covering a variety of expenses, managing cash flow, and establishing credit. However, your credit card can quickly become a liability for your business if you fail to manage it well.
Here are six common mistakes small business owners make with their credit cards. Whether you are guilty of making just one mistake or all six, it is imperative that you address the issues now to ensure your credit card remains a business asset and a valuable tool for securing future financing opportunities.
1 – Choosing the Wrong Type of Credit Card
Business credit cards offer numerous features, but not all of them are necessarily helpful for your business. You need to be selective in order to manage your credit well and avoid the high interest rates, fees, and over-spending that can hurt your company’s bottom line.
Before you choose a small business credit card, get clear about why you need the card and how you intend to use it. Look at your business lifestyle when evaluating reward programs to help you narrow down the choices, then invest the time to comparison shop. Online credit-card comparison websites such as CreditCards.com and Bankrate.com allow you to search for cards by a variety of categories, ranging from bank and card type to rates, benefits, and credit worthiness. You can even apply directly online.
2 – Mixing Business and Personal Expenses
Despite knowing it is critical to keep business credit and personal credit separate, some small business owners give in to the temptation to use their personal credit card to make business-related purchases or to fund business activities. Mixing the two can lead to a host of potential problems, from being unable to accurately track or cover business expenses to problems identifying relevant expenses at tax time. Having the discipline to use your business credit card solely for company purchases and other business expenses helps you maintain more accurate records, making it easier to budget, plan, and spot tax deductions.
3 – Maxing Out Your Card
Using your business credit card is a good way to build up a credit history, but spending too much can have a negative impact. Prospective lenders look at a potential borrower’s utilization ratio, which is calculated by looking at your monthly spending as compared to your monthly credit limit.
Having a low utilization ratio, meaning not much debt and plenty of available credit, is good for your credit score. However, routinely maxing out your credit card can be considered a sign of financial trouble. This can make it harder for you to qualify for small business loans or lines of credit or result in paying a higher interest rate on your loan. Experts advise using no more than 30% of the available credit on a business credit card, even if you are paying the balance in full each month.
4 – Canceling Your Account
It may be tempting to close your business credit card account once you have paid off high interest debt. However, this can adversely affect your credit score. If you have multiple credit card accounts, your credit utilization ratio may go up because you are decreasing your total available credit limit. If this is an older account, you might be lowering the average age of your credit accounts, which can also impact your credit score. Keeping the account open, even if you have paid off the balance, will help you avoid potential issues like these. It also gives you the option of tapping into it again if a future need arises.
5 – Ignoring Interest Rate Changes
If you’ve shopped around and done your homework, chances are you have found a business credit card that offers 0% APR to start, usually for a period of six or nine months. This kind of introductory offer can be a huge benefit for business owners, especially when you’re just getting started or need to boost your working capital.
The key to maximizing this benefit is to pay strict attention to when the introductory period ends. At that point, your interest rate is likely to increase to 18 to 20% or higher. If you have a sizeable credit card balance, this can cost you dearly in interest expenses. Planning ahead and paying balances in full will help you steer clear of making this critical mistake.
6 – Not Making Timely Payments
Falling behind on your credit card payments can happen all too easily when you are busy running a business. However, making late payments can have serious consequences. In addition to having to pay a penalty, you may be putting both your business and your own personal credit score in jeopardy and limiting your long-term financing options.
Take the time to add payment reminders to your calendar. If you have delegated this responsibility to staff members, make it clear that paying credit card bills on time is imperative. Alternatively, set up automatic payments through your card provider and be sure to maintain a minimum balance in your bank account to cover the expense.
When used wisely, business credit cards provide flexibility for small business owners with short-term financial needs and for those who are trying to establish good credit. For situations when a credit card is not the ideal financing solution for your small business, contact Summit Financial Resources to find out how we can help you access the working capital you need.
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Summit Financial Resources specializes in working capital financing for small to medium-sized businesses that need increased cash flow. We provide working capital financing through invoice factoring, asset-based lending, inventory lending, and equipment financing.