Applying for a business credit card is often one of the first steps a small business owner takes to establish and build credit. Small business credit cards are a good option for covering a variety of expenses and managing cash flow. Many credit card companies offer rewards and other perks such as car rental insurance and travel accident insurance. However, misusing or mismanaging your credit card can end up hurting your business more than helping it.
To help ensure that your credit card is an asset to your small business and a tool for securing future financing opportunities, it is important to understand and avoid these common pitfalls:
Not Paying the Monthly Balance in Full
Running a credit card balance may be a normal practice for many small business owners, but failing to pay the full amount each month can lead to excessive fees and a higher interest rate. This may significantly increase your total cost. A good rule of thumb is to use your business credit card for smaller purchases that are easy to pay off, and consider financing larger expenses.
Not Making Payments on Time
Making late payments on your business credit card 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. Some card issuers will increase your interest rate or take away any rewards earned if your payments are late. When you apply for your card, make sure you are aware of any penalties for making a late payment as well as for not paying the bill in full each month.
Mingling Business and Personal Expenses
Small business owners often struggle to keep their personal expenses separate from their business finances, but the benefits of doing so are worth the effort. Using a business credit card solely for company purchases and other expenses helps you maintain accurate records, making it easier to budget, plan, and spot tax deductions. This can save valuable time and help you avoid issues at tax time. Remember that making business-related purchases with your personal credit card does not help build your business credit score, so make sure you have a card that is dedicated solely to company expenses.
Using Too Much Available Credit
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 compares the amount of credit being used to the total credit available to the borrower.
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.
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Failing to Monitor Employee Spending
Giving business credit cards to employees allows them to take responsibility for purchasing things they need to get their jobs done and can make bookkeeping easier for your business. However, to avoid putting your business finances in jeopardy, you will need to monitor employee card usage regularly. Be selective about how many cards you distribute and to whom. If your team’s individual spending habits are a concern, look into cards that have spending limits or create a policy where a group of employees shares a single card with a spending limit.
Not Checking Your Monthly Statement
Make a habit of reviewing your monthly business credit card statement prior to paying your bill. While it is important to look for errors or fraudulent charges, this practice helps make you aware of your company’s spending habits. Not keeping track of expenses is arguably the most common and potentially the most costly way that small businesses end up wasting money. Taking stock of where you are spending money and which expenses are adding up will help you manage cash flow and determine where and how to manage or cut costs moving forward.
Closing Your Account
It may be tempting to close your business credit card account once you have paid off high interest debt. However, this can have a negative impact on 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 decreasing the average age of your credit accounts, which can also impact your credit score. Keeping the account open also gives you the option of tapping into it again if a future need arises.
When used wisely, business credit cards provide convenience and flexibility for small business owners with short-term financial needs and for those who are trying to establish good credit. Improving creditworthiness should always be one of your key business goals, since it is critical for obtaining funding opportunities down the road. When a small business 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.