Beware of This Business Credit Card Catch-22

By Eva Norlyk-Herriott

For years, home-builder John London of Iowa had a pretty neat business formula going. When putting up a house, he would charge the cost of materials to his credit cards, pay the minimum monthly payment for a while, and then pay the cards off in full when the home was sold.

Unfortunately, that nice little money-making machine has cranked to a halt. The high balances on his credit card accounts made it look like London had maxed out his cards. This in turn caused card issuers to slash his credit limits and increase the interest rates on his credit cards. This not only made his interest rate sky-rocket to upwards of 20%, but the minimum payment on his cards almost doubled.

Suddenly, London finds himself in a situation where that once easy credit has turned into a serious debt burden with sky-high monthly payments, which put a serious strain on his cash flow. Just as bad, with the reduced credit lines, he is having trouble keeping his business operating smoothly and producing enough income to serve his increased debt expenses. In short, he is trapped in a classic Catch-22.

When used well, business credit cards can create a convenient back-up reserve for those times when a business needs a short-term cash infusion. However, in the current credit environment, relying on credit cards for business funding is becoming increasingly risky and could quickly backfire. To keep business credit lines open and interest rates down, follow these simple tips:

1. Pay all bills on time. It’s a no-brainer, but it still bears repeating: Don’t let one payment slip, not even by a day, just because you’re busy with other things.

2. Don’t keep a high balance on any credit cards. Don’t let the total credit usage exceed 30% of the credit available; ideally keep it below 20 %. If you need more cash, it’s better to apply for new credit cards (as long as your credit is good) than it is to increase the credit utilization on existing cards.

3. Use all credit cards regularly. Inactivity is one reason for credit line cuts, so make sure that you regularly make charges on all your credit cards.

4. Be proactive. If you’re having trouble making a payment one month, contact the card issuer and let them know why. If you can convince them that it’s due to cash flow problems and a one-time occurrence, most card issuers (or other creditors) will work with card holders to extend the due date, waive the late fee, and report the account as “current” to the credit bureaus.

5. Look for other sources of financing. Explore other sources of funding, such as a venture capital infusion, a bank loan, or a home equity loan. Establishing a relationship with a small community bank can often translate into a line of credit with much more favorable terms than a credit card. And while applying for a loan from the Small Business Administration involves more paperwork, in the long run it can provide you with a reliable source of funding at relatively low interest rates.

6. Don’t take out more credit card debt than you can pay off. Business credit card debt is like personal debt. The longer you hold it, the more you get in over your head. Don’t take out more than you can pay off within a few months.

Published: June 12, 2009