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Using Credit Cards In Your Small Business

Updated on January 6, 2012
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Ed has been an entrepreneur and business owner/start-up generator for 15 years. He has also been a shotgun coach!

Don't Tempt Me Satan

Under-capitalization is the key component for failure of most small businesses. The truth of the matter is that is only a symptom of a bigger problem: The lack of a solid business plan. But most small businesses come from ideas taking root, often organically, with limited planning and the need to move quickly. Handled properly, which is a huge caveat, the use of credit cards to start a business can be successful.

When deciding to go into business, putting everything down on paper to begin with is always the best way to start. A complete business plan including financial expectations and needs assessment should be calculated. Without these very important details for some reason or another, (never good) poor decisions will be made that may have disastrous results later.

Personal credit cards hold the person who's name is on the card responsible for payment regardless of what was purchased with the card. In other words, if you bought a new copier for your business using your personal credit card - and the payment to your credit card company isn't paid, it is a bad mark on your personal credit - not the credit for the company! The credit card company is coming after you to pay the bill. They can be very aggressive in getting their money back including taking you to court. If your card also has your spouse on the account - the credit card company may go after your spouse's income garnishing wages and causing all kinds of trouble.

Interest rates vary according to a number of factors. If your credit is good, it is possible that you will have very competitive credit card interest and fairly large spending capacity. It isn't impossible to get $5,000-$20,000 worth of credit very quickly even with today's more strict banking regulations. But if you aren't getting paid by your customers on time or your suppliers aren't offering decent terms - or delivering products on time - it is very possible you can get stuck holding the bag on very large debts with very high interest rates and no way out.

I have heard of people buying homes on their credit cards in some of the depressed market areas. I know of a local auction where some sailboats and a 32' yacht all sold for under $300 each, all foreclosed properties. Buying these properties with a credit card and not being able to clear it on the turn before too many payments come due can put you in the same situation pretty quickly. There is a reason someone else didn't get regular bank financing on either the houses above or the cheap boats - banks may not be loaning on them.

It Can Work

There are situations where suppliers don't want to deal with anything but credit cards. I know companies in the safety business, medical distribution, hospital supply and advertising - a broad cross-section - that all require purchases using credit cards or debit cards (government P-cards too). There is an automatic paper-trail of the transaction and the customer and seller have a contract immediately.

I know of a t-shirt/advertising company that does all of their purchasing off of a stack of credit cards. I believe the management team, all entrepreneurs in a true sense, pulled out their credit cards and handed them to one of the guys to do purchasing. That is how they do it now and have for two years. They are finally getting a bit ahead of the payments required and the demands to keep food in their mouths. I believe these folks are going to make it. They have been quite careful not to exceed their need for cash flow by over extending their credit limits on the stack of cards so their suppliers continue to ship. They have stayed on top of their customer's payments such that they get money in quickly and can keep their days out on credit as low as possible reducing the cost of money.

Pitfalls

My advice includes two pitfalls encircling the use of credit cards in your small business. One pitfall is on the spending side of the business. Getting over-extended using credit cards and not applying the payments directly when the associated purchase comes in as sold products can cause cash flow nightmares. Regarding the accepting of credit cards, a problem that can develop is if a customer pays you for product that you can buy on 30 days net terms and you run the credit card but don't pay for the product when it ships - wanting to keep the gross proceeds in your account for 27 of the 30 days net terms you have with your supplier - if you forget those funds are dedicated to that bill, when it comes due you may be short on cash. It happens, put safeguards in place to prevent these issues. The best advice is to pay the supplier as soon as the credit card payment hits your account and possibly take advantage of early payment terms in your favor.

Evaluate Your Options

Credit cards are going through some transformations right now due to government intervention world-wide. Spend the time and effort to do some comparisons and see which provides your the best choices. Interest rates, annual fees, points used for travel or other purchases, cash back, flexibility of purchases, size of line of credit, number of users on the same account, travel and other discounts, and acceptability by merchants. Be sure to evaluate your credit cards for the values they provide your company before using them. Debit cards have the greatest risk - once that is given out someone could literally wipe out your bank account with a quick tug on the account! Be cautious in the use of debit cards.

The Inventurist

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