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9 Tips for Using Business Credit Cards in a Tight Economy

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By Eva Norlyk Smith, Ph.D.
December 12, 2009

Credit cards have increasingly become the preferred financing choice for small business owners looking for short-term loans. According to a study by the National Small Business Administration, the number of business owners who used credit cards to finance their business increased from 49 percent to 59 percent in just the four months from December 2008 to May of 2009.

Unfortunately, the tightening credit environment has also led to tighter terms for business credit cards, and tougher standards for approval for new credit cards. Some credit card issuers now require self-employed applicants to show proof of earnings when they apply for a business credit card. Worse, credit card companies have become much more aggressive about raising interest rates, slashing credit limits, or increasing the minimum payment due, making business credit cards an increasingly risky form of financing.

Small business credit cards are like spouses, you can’t live with them, and you can’t live without them. If you’re a small business owner, how do you take advantage of the benefits of credit cards while taking steps to avoid their pitfalls? Here are nine tips to using business credit cards in a tight economy.

1. Keep that credit score high. This is a no-brainer. Unless your business already has a long established credit history, card issuers will use your personal credit score when evaluating your credit card application. To get a business card with the best terms, you need to keep your credit score as high as possible.

2. Use a bank with which you have an established relationship. Banks with which you already do business will be more open to issuing you a credit card. Many small, local banks and credit unions issue credit cards, and establishing a personal relationship with these can be a great way to get a low interest credit card. If your current bank doesn’t issue a credit card, open an account with one that does.

3. Keep different cards for different purposes. Use cards with a low interest balance transfer APR for credit card debt you carry forward. Use a different card for purchases which you pay off every month.

4. Go with the best deal. The best deal isn’t always on a small business credit card. Generally speaking, you are personally liable for all credit card debt, whether or not it’s on a credit card in your name or in the name of your business. So if you can get a better deal on a personal low interest credit card, opt for that.

5. Don’t use credit cards to put out fires. Incorporate credit cards into your overall financial planning. Know how much you can put on in purchases each month and still pay off in full. If you decide to take on credit card debt, project how much you can take on and still pay off before the low interest expires.

6. Know the difference between good debt and bad credit card debt. Make a conscious decision about the debt you take on. Credit card debt that tides the business over while waiting for accounts receivables is perfectly acceptable debt. So is debt that helps increase business income, such as a short term bridge loan for purchasing new equipment. Mounting credit card debt that essentially only fills in gaps between income and expenses is bad debt.

7. Have some form of back-up in place. Don’t risk getting trapped by changing credit card terms. Have a plan in place should your minimum payment double, interest rate increase, or credit limit get cut. Have one or several unused credit cards available as back-up, or in a bind, explore other financing alternatives, such as account receivable financing.

8. Manage your business credit wisely. A basic rule of thumb for all business owners is to keep personal expenses separate from business expenses, and this applies to small business credit cards as well. Not only does this keep your accounting more clean for tax purposes, it also allows you to use the extra services that come with business credit cards to help you track your monthly business expenses and employee expenditures.

9. Keep in touch with your card issuer. If you plan to make a big balance transfer, which will bring your card close to the credit limit, call your card issuer and let them know what you’re doing, why you’re taking out the balance transfer, and when you plan to have it paid off by. Otherwise, the high balance could create a red flag to card issuers that your business might not be going so well. This might in turn cause them to raise the minimum required payment, lower your credit limit, or even raise the interest rate on the card.