Business owners are a hard working lot, willing to take risks and learn from their mistakes. They are generally educated and not inclined to handle money frivolously. According to the National Federation of Independent Businesses (NFIB), sixty percent of small businesses in the United States use a credit card specifically designed to help them manage spending. With so many business owners utilizing credit cards as a financial tool, there must be good reason. As with all good things, there’s a less than positive side. Before you agree to use a credit card for your company purchases, it’s important to understand the benefits and how they may apply to your business and the pitfalls that could put your business into jeopardy.
When the cost of production, overhead, employees and benefits are added up, many entrepreneurs find that they’re short the necessary funds to cover all their business expenses. It’s hard to imagine a startup company being able to negotiate the ups and downs of a new business venture without having access to an outside source of revenue. This is the scenario for many start-ups to begin using credit.
There’s no doubt that credit is a necessary factor in building many businesses. Just as an individual benefits from having a lengthy credit history and an excellent credit score, so does a business. Without them, it will be difficult for a business to secure the necessary loans they may need for improvements, growth and hiring additional employees.
The Cost of Borrowing
Interest charges are by far, the costliest factor when borrowing. The best rates are rewarded to the businesses that have excellent, lengthy credit histories. Previous loans that have been repaid without late or missed payments, will go a long way to establishing a history that reflects responsible money management. Lenders will be more inclined to lend to your business at lower interest rates, as well as longer periods of time. If the first venture into the field of business credit cards is a less than desirable interest rate, don’t let it get you down. After demonstrating your ability to handle the debt, other opportunities will come your way to secure a lower rate card in the future.
Business owners who use their personal credit cards to pay for company expenses are making a bad business move. Instead of helping the business, the credit history is benefiting the individual and not the company. For a credit card to benefit your business it must be in the name of the business entity, either a corporation or LLC. In addition to a name, you’ll need a tax ID number from the IRS in order to open an account for your business. An accountant can advise you on the best legal structure for your particular situation, as your choice in entity can have some pretty significant tax implications. Apply for your business’ EIN online through the IRS site — and don’t worry, the process is fast and simple.
The Ease of Approval
Business credit cards are one of the most practical credit line options for start-ups and small businesses and generally easier to secure than a business loan. Large corporations with annual revenues over $25 million typically qualify for corporate credit cards and commercial loans and other financing options. A small business credit card will provide the needed funds at reasonably low rates (averaging 15.50% as of April, 2013) and require no collateral, making them a wise choice for a business hoping to build a credit history.
Full Credit Report Disclosure
If your credit transactions are not reported to the major reporting agencies, you won’t be building a history. This is when you need to be proactive in checking that your vendors are fully disclosing your credit activity. Just as your personal credit score and history is built on a variety of activity, the more vendors that report a good payment history for your business, the healthier your credit history will be.
Keep Good Personal Credit
While you are establishing a reputation for your business, lenders will be looking at your personal credit history as the owner. It is common practice that you will also be expected to accept responsibility for the actions of the business’ credit card. So it’s important that your personal behavior matches that of your business.
Just as your personal credit history takes time to grow, building impressive business credit isn’t going to happen overnight. The process can be quicker when you practice impeccable money management. An excellent credit history will provide loan and credit opportunities for your business to grow and prosper. Easy access to bank funds will also help your business navigate changing conditions and position your company for success.