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What Business Owners Should Know About Credit Cards

What Business Owners Should Know About Credit Cards

How important are credit cards to new business owners?

Credit cards are important for new business owners because they can save a business from dire straits, but they can also (unfortunately, more often than not) put a small business in major financial trouble when used unwisely. They are a great financing power that should come with great responsibility on the entrepreneurs’ part. Getting one or increasing the limit is not the challenge. Resisting the temptation to use them as the first source of funding is.

Is a credit card the best way to fund a new business?

A credit card is probably the worst way to fund a new business. The cost (interest) is too high, the reins are in the hands of the bank (they can change the terms, including the interest, at will), and it is tempting to see a large credit limit as free money. It is anything but.

What should a new business owner look for in a credit card?

  • Low interest rate.
  • Relevant and useful perks (e.g., generous airline travel points to be used by the salesforce of the firm).
  • A strong and reliable financial institution behind the card (preferably one with which the entrepreneur has had a working relationship for some time).
  • Strong IT support and protection against fraud.
  • A good balance of consistency in policies and responsiveness to the entrepreneur’s needs, on the issuing institution’s part.

Are credit cards better for some new businesses than others?

Credit cards might be more suitable for seasonal, or otherwise more predictable businesses. Most seasonal businesses experience a cash crunch at certain times of the year. If the small business has an established customer base (B2B or retail) and at least a few years’ experience/data that shows cash flow patterns due to seasonality, credit cards can work fine. Use it before the season. Pay it off (entirely) in a few months with the expected revenues. Financing cost might be higher, but credit cards can be useful, so long as they enable the firm to grow and reach a state where structured and cheaper external funding becomes available. They can also help firms overcome infrequent financial mishaps they are sure to encounter sometime during the growth of the firm.

Are credit cards better or worse for new business owners now than before the Great Recession?

Credit cards are useful when they have low interest and high limits. The credit conundrum is that banks want to offer credit to those who do not need it. And those who need it the most get the highest interest rates and lowest limits. As counterintuitive as this might sound, if you think you do not need credit cards, this might be the perfect time to get one (or more) on good terms for the future. If, however, you are in dire need of external credit continuously, credit cards can only help overcome one or a few such challenges. In this case the problem is structural.

As for recessions, they happen all the time. Some are smaller scale, regional, and/or industry specific. Others, such as the “Great Recession,” have more widespread and drastic consequences. I think the current business environment in the U.S. (as of August 2017) has almost completely shaken off any residual problems. I do not think entrepreneurs should think of the recession. They should pursue great opportunities that they are passionate about, with as much financial/operational rationality as possible. Credit cards are a necessary evil. Entrepreneurs should focus more on the specific financing problem at hand and the interest rate of their cards than the recession.

This article first appeared on Wallethub.com.

John Petosa
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