Starting a business can propose many different problems for an individual that is insufficient in start up funds. After all, we’ve all heard the phrase “It takes money to make money.” This phrase can be deceiving however, as there are many disadvantages to using credit for your business – especially in the early stages.
Diving into credit with false pretenses can be very harmful to your dreams and aspirations for your business. That being said there is such thing as “good” debt (at least in comparison to “bad” debt). If you are using credit the right way and at the right time, then credit can be very good for your business. It’s all about being disciplined and learning when the time is appropriate.
Here are a few things to remember when using a credit card for your small business:
- Even though its called a business credit card, if you are running a small business, you as the owner are still personally responsible for the debt as small business credit cards are not protected by the Credit CARD ACT. This fact may want you to lean towards using a personal credit card, but the next topic shows that there are still advantages to using business credit cards as well.
- With personal credit, having multiple accounts can be frowned upon. However it is not the same with business accounts as having multiple cards for different things demonstrates that you are savvy about your expenses.
- Acquiring assets and paying expenses with business credit cards can give you a false sense of where your business stands. It is much better to pay with cash whenever you are able to.
- To build a good rating you should ask vendors to do all your reporting for you payment performance, as business creditors are not required to report payments to the bureaus.
- There may be some information in your business profile that will be self-reported by establishing profiles with different credit bureaus.
There are however, many advantages to having a business credit card and according to a Tower Group report, over 2/3 of small businesses use a credit card for expenses. That being said, only 40% use them exclusively. You want to be a part of that 40%.
Before you even establish a business line of credit you want to make sure you understand your financials and that federal account history and balances are aligned with your records. You also want to determine how much credit you actually need. You can do this by analyzing your business plan that you have come up with and foreseeing your monthly cash flow. Here are ways to stay responsible and advantages to using credit.
If you are a person that drives a lot, you want to make sure that you go to a gas station that has rewards for using so much gas. The same goes for your business. If you are using credit cards responsibly and a lot, then there are lot of opportunities out there for rewards for doing so – you just have to find which ones provide the best rewards.
Avoiding co-mingling can be very hard, especially for start ups. You should remember to use your business credit card for just that – business – and just that only. Avoid using it for things like house repair at all costs. Doing so will show creditors that you mean business.
Stay Current With Your Credit Providers
Knowing what your credit card companies are up to is very important. Policies and fees are always being changed and you want to make sure that you know how these updates will effect you exactly. There are many different nuances to small business credit cards and to get the best results you have to do your research and make sure you know exactly how your credit card protects you as a small business. And yes this involves checking your mail every time one of those credit card statements finds its way on your kitchen table.
Only Take on Revenue Increasing Debt
This may be the most important thing you can do when using credit. Every time you come up with an idea that you think will possible make you money, it is very easy to just “put it on your tab.” This type of mind set is bad for your business however and is a great cause for falling into a lot of unnecessary debt. Hiring new staff members, or purchasing equipment and needed assets for your business are all good reasons to go into debt, and you should keep in mind that you should only go into debt if you know for sure that it will increase your revenue.
About the author
Philip Rudy helps run and maintain www.CreditDonkey.com, which is a web site that helps guide people to the best routes towards obtaining business credit cards.