By Meredith Wood
Having a business credit card—and using it responsibly—is an important part of being a business owner. It’s a great way to build business credit, earn points to use towards travel and other expenses, and even give yourself an option for short-term financing.
It’s no wonder that most business owners obtain a business credit card. In fact, as of 2016, 67% of American business owners have a business credit card.
However, without taking proper care to use your business credit card responsibly and pay off your balance each month, you can easily get in way over your head. Credit card debt plagues many Americans—business owners and consumers alike. In fact, 38% of American households report having some credit card debt.
You likely already know that it’s best to pay your balance in full each month, and never miss a payment. These are the key components of using a business credit card responsibly.
But what else can you do to ensure you’re not racking up business credit card debt in the first place?
It’s more than possible to stay debt-free and still use your business credit card regularly. Here are 5 solid tips to make your business credit card work for you (rather than the other way around).
Treat your card like cash.
If you have a set business budget, you know how much you can afford to spend on certain areas each month. Unless you’re taking advantage of a 0% APR introductory period, you should not use your business credit card as an excuse to go way over budget (and even then, proceed with caution).
By treating your card like cash, and therefore only using it to purchase what you know you can afford, you can avoid overspending on your business.
One method that works for many people is to pay off each purchase as you make it. Instead of waiting to pay off your card at the end of each billing cycle, you can simply pay it off as you go. That way, your balance doesn’t get so high as to be overwhelming, and you’re more on top of what you can manage to spend.
Set aside a business emergency fund.
In the personal finance world, one of the biggest recommendations for consumers is to keep a solid emergency fund at their disposal at all times. This means you’d have 3-6 months of expenses saved in case of an emergency that leaves you without income for an extended period of time.
You should apply this same concept to your business. Running a business can be volatile, especially at first—you can’t always predict when you’re going to hit hard times. In these instances, a lot of business owners turn to their business credit cards to cover their expenses, which can quickly build up debt.
If something happens and you’re, for whatever reason, low in cash one month or otherwise unable to make your regular payments (such as payroll or the rent on your office space), you want to be prepared so that you don’t rack up credit card debt on top of the financial hardship you’re already experiencing.
An emergency fund of 3-6 months of business expenses will give you peace of mind and make sure you stay above water until your business is back on solid ground.
Consider a balance transfer—but only if you really can’t afford to pay your balance.
Balance transfer cards are the unsung heroes of paying off credit card debt. They allow you to open a new card account and transfer an outstanding balance to it for a small fee (usually 3-4% of the balance). Then, you will have a specified period of time—usually somewhere between 6 and 18 months—to pay off the balance at 0% interest.
This gives you more flexibility, as you’ll have more time to pay off your business debt without accruing interest. But be careful—if you’re not prepared for it, the APR might set in before you’ve paid off your entire transferred balance. If you’re not sure you’ll be able to pay off your outstanding balance within the credit card’s specified 0% APR period, a balance transfer card may not work for you.
Additionally, you should do whatever you can to pay your balance off in full each month so that you never have to apply for a balance transfer. If you can afford to pay off your balance but simply want to delay the due date, a balance transfer will mean paying more in the long run, thanks to the unavoidable balance transfer fee.
Thoroughly understand your credit card terms.
It’s an unfortunate truth that credit card terms are lengthy and confusing. But understanding them means knowing when using your card is going to cost you more money—and how to keep that from happening.
For example, is your business card actually a credit card, or a charge card? What is the interest rate or late fee? Is your interest rate going to go up for any reason, and if so, when?
These are all questions you can answer yourself by thoroughly reading through your business credit card terms and conditions. The more proactive you are about understanding these terms in the beginning, the more responsible you’ll be as a cardholder.
Stick to one card (at least at first).
Many business owners choose to have multiple business credit cards that they can pull out at any given time. And sometimes, depending on the size of the company and breadth of monthly expenses, this makes sense.
However, especially as a first-time business credit card owner, it’s important to get used to how to use your card without going overboard in your spending. A business credit card can give you a feeling of hard-earned newfound freedom, which is great—but only if you don’t let it get to your head.
By only using one card (at first), it’s much easier to keep track of all of your business spending, as it’s all in one place. Once you get used to using your one card and paying it off in full each month without going over budget, then you can consider adding another card to the mix.
Staying out of business credit card debt should be your number-one priority—otherwise, your card is doing you more harm than good.
When used responsibly, a business credit card in your pocket can help open many doors. It can give you breathing room to purchase now and pay it off (a little) later, as well as help you earn rewards points or cash back to help cover other expenses in the future.
Don’t let debt keep you from reaching your full business potential.
Meredith Wood is the Editor-in-Chief at Fundera, an online marketplace for small business loans that matches business owners with the best funding providers for their business. Prior to Fundera, Meredith was the CCO at Funding Gates. Meredith is a resident Finance Advisor on American Express OPEN Forum and an avid business writer. Her advice consistently appears on such sites as Yahoo!, Fox Business, Amex OPEN, AllBusiness, and many more. Meredith is also the Senior Financial and B2B Correspondent for AlleyWire. @fundera