Managing The Disadvantages of Small Business Credit Cards
In order to start and grow a new small business huge amount of capital is needed depending on the type of business. Since loans are almost next to impossible for new ventures business owners look at credit cards as the next best thing to secure the funding that they need. Used wisely small business credit cards can go a long way and provide a host of benefits that help business owners run a profitable and efficient small business. On the other hand in cases where the account is mismanaged the drawbacks can be detrimental ruining the business and the personal credit of the business owner. The points below discuss a few of the drawbacks and the steps that can be taken to avoid them.
Most business credit card companies will demand that the applicant for the small business credit card sign a personal liability agreement when they are approved for the card. This agreement might run for a year or two until the business gets established. This agreement means that the personal and business credit is tied to each other and the owner becomes responsible if there are any defaults on the payments. If the business goes under for any reason and there is no way to repay for money owed then the owner becomes personally responsible for paying the balance or is at risk of having his personal credit ruined.
This danger can be minimized by registering the business with the credit card bureaus long before a loan is required. If the business has established credit then this will prevent the need for signing a personal liability agreement and having business and personal credit linked.
Small business owners are so gratified in getting access to a line of credit that they completely turn a blind eye to the fact that the interest rates on small business credit cards are very high. The rates are even higher than those of personal credit cards. The only way to avoid these high rates is to pay off the balance before the grace period but this is sometimes difficult when the business is new. Paying off the balance means compromising cash flow and sometimes late payments from customers make this even more impossible.
One final way to reduce the drawbacks of business credit cards is to open a business checking account where all business transactions should take place. If there is any instance of liability being charged to the owner of the business then payments will be taken from the business account rather than the personal account of the business owner.
Eliminate Personal Liability
Most business credit card companies will demand that the applicant for the small business credit card sign a personal liability agreement when they are approved for the card. This agreement might run for a year or two until the business gets established. This agreement means that the personal and business credit is tied to each other and the owner becomes responsible if there are any defaults on the payments. If the business goes under for any reason and there is no way to repay for money owed then the owner becomes personally responsible for paying the balance or is at risk of having his personal credit ruined.
This danger can be minimized by registering the business with the credit card bureaus long before a loan is required. If the business has established credit then this will prevent the need for signing a personal liability agreement and having business and personal credit linked.
High Interest Rates
Small business owners are so gratified in getting access to a line of credit that they completely turn a blind eye to the fact that the interest rates on small business credit cards are very high. The rates are even higher than those of personal credit cards. The only way to avoid these high rates is to pay off the balance before the grace period but this is sometimes difficult when the business is new. Paying off the balance means compromising cash flow and sometimes late payments from customers make this even more impossible.
- It is possible to reduce the back lash of interest rates though by avoiding the instance of too many debts that are spread across various accounts. Stick to one account that you can keep a close eye on and manage.
- Establish a good credit rating to attract the best and lowest interest rates from credit card providers. A 1-2% reduction in interest rate on a high balance could save the business hundreds of dollars every year.
- Use the credit line and business funds wisely. Only responsible employees should have access to the funds if there is a need to issue extra cards. The small business credit card should be used only for business expenses and not for personal use.
One final way to reduce the drawbacks of business credit cards is to open a business checking account where all business transactions should take place. If there is any instance of liability being charged to the owner of the business then payments will be taken from the business account rather than the personal account of the business owner.
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