For some, “credit card” is a bad word. For the young entrepreneur, it’s a necessity. Without a credit card, you have to siphon personal spending money directly from your business the minute you make a profit. Yet, at the outset, profit can be hard to come by. I’m not advocating for you to go into debt. I’m saying that using credit cards the smart way can help keep your head above water as you navigate the beginnings of a business.
Personal Credit Card Versus Business Credit Card
Some solid advice from Entrepreneur Magazine: “If you think you won’t be able to pay off purchases in a single billing period, it might be better to charge them on the personal plastic, rather than a business card.”
Business cards come with incredibly high interest rates, and the Ewing Marion Kauffman Foundation found that every $1,000 of credit card debt your business accrues will make you 2 percent more likely to fail.
In other words, take on $10,000 in debt, and your chances of failure are 20 percent higher than they would have been otherwise — and that’s just due to credit card debt alone. There are countless other issues that can throw a wrench in the works, such as staffing issues, ineffective marketing, and inventory problems.
For the most part, keep business expenses and personal expenses separate when you’re paying with credit cards, but think hard about whether you should burden your business credit with expenses over a certain amount.
Establish a set baseline figure you can afford to put on the business card — it should not exceed revenue. Fill out a cash flow statement. Look at projected expenses, revenue and profits, and charge basic expenses on the business card. Then, charge additional expenses onto your personal card. If you can’t pay it off right away, your creditor can’t raise the interest rate like they can with a business card.
Consider tried-and-true methods of stacking savings — for you, the number one piece of advice here is to use a cash-back credit card.
You won’t be able to get a cash-back credit card unless your credit is good enough as is. Once you’re able to get one, use business profits, your own savings, as well as investor funds to pay off the card immediately. Try to pay your entire balance each month. You’ll make extra money that can go right back into the business. And you’ll build your own credit.
Building Business Credit
Your own credit score is extremely pertinent to your business credit. Before you even begin looking for a business credit card, check your FICO score and dispute any claims you think may be in error. Next, review your options for your business credit card.
Noobpreneur points out that the best option may not come from a major company. Rather, talk to the bank you’re using for your merchant account. They may be able to offer you a card more tailored to your specific business needs, and since they want to be competitive, they could give you a better interest rate.
Think about the nature of your business. If a lot of travel is involved, look for a card that earns you frequent flyer miles. If you’re confident you can pay off the card at the end of the month, find a rewards card, even if it has a higher interest rate. This is a gamble, but those rewards can really pay off. Ignoring them is one of the big mistakes small businesses make with credit cards.
Another mistake is paying interest. Again, if you can’t pay in full or miss payments, your credit issuer can immediately raise interest rates. But your credit issuer may initially give you a deal in which you pay no interest on purchases and balance transfers. For the new entrepreneur, it’s a wise idea to take advantage of those offers.
Make sure to protect your business against fraud by keeping your financial docs in a safe place, and only allow your most trusted employees access to the card for business expenses. Monitor the account and make sure no large, unfamiliar charges pop up, and be careful when you’re exchanging any sort of financial info with clients.
Watch your cash flow carefully and only charge what you can afford to with the business card. Regular payment will build your business credit.
Travel Expenses and the Business Card
Are you going to be taking any business trips? As you may well know, you can deduct business travel expenses on your taxes, as long as the expenses aren’t lavish or out of the ordinary. You can deduct the cost of travel, lodging, meals, tips, dry cleaning and laundry, business calls, etc. And when you travel, it’s best to put these expenses on the business credit card.
Why? Use the card, and there will be clear documentation of every business expense you accrue. And if you have a cashback card, you’re not only getting paid back for travel expenses, you’re making money in the process. Furthermore, you’re building credit. There’s no doubt you’ll recoup what you spend, so in essence you’re traveling for free and showing creditors you can reliably pay them back.
Airlines and hotels are two of the three most popular rewards program partners for credit. That’s a good thing for the young entrepreneur who needs to do plenty of traveling to get the business rolling. If you’re traveling abroad, your credit card issuer will give you the option of dynamic currency conversion (DCC). This means you’ll pay in dollars instead of the local currency. Be aware that DCC, while convenient, can increase what you pay by more than 3 percent. It may not matter to you if you’ll be writing off expenses later, but if you’re buying something that’s not business-related, save money by declining DCC.
Additionally, when you’re traveling abroad, you can avoid foreign transaction fees by using an EMV chip card from an issuer like Capital One, Pentagon Federal Credit Union, or Discover.
Don’t Accrue Debt
At the outset, do your best not to rack up credit card debt. Use any other means you can to finance your business. Small business loans are more forgiving than credit card debt, and your friends, family, investors, and personal savings are better sources of funding than credit cards. Once your business is on stable footing and you have good data to plug into your cash flow doc, you’ll be able to reasonably predict expenses, revenue, and profits. Then, make smart charges to your business credit card as you continue building credit.
Noah Rue is a journalist and a digital nomad, fascinated with the intersection between global health, personal wellness, and modern technology. When he isn’t frantically updating his news feeds, Noah likes to shut off his devices, head to the beach and read detective novels from the 1930s.
Credit cards stock photo by ViDI Studio/Shutterstock