Editorial Policy

Should You Use Business Credit Cards as Capital?

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By Eva Norlyk Smith, Ph.D.
September 13, 2011

If you need money to start a new business or a temporary cash infusion for an existing business, a promotional offer, such as a 0 percent balance transfer on a business credit card, may seem like a tempting option.

But before jumping in, take a careful look at your business to make sure it is a good fit, say experts.

Business owners with excellent credit can often qualify for initial credit lines as high as $100,000, as well as 0 APR promotional offers on balance transfers and purchases. However, experts caution against getting too deeply in debt on business cards because the risks may be higher than the benefits.

“The CARD Act doesn’t apply to business credit cards, so all the protections we now take for granted vanish when you get into business credit cards,” says Bruce McClay, Media Director with ClearPoint Credit Counseling Solutions. “Prior to the Act, card issuers were able to change terms with little or no notice. That’s still the case for business credit cards. So there are a lot of cautions to take into account.”

If you’re considering a 0 percent APR offer on balance transfers or purchases, the most important thing to keep in mind is that interest rates on business credit cards can be raised retroactively on existing balances (which isn’t allowed on personal credit cards).

Miss a payment by a couple of days, or make a payment that is returned unpaid, and that 0 percent APR balance transfer could jump to a whopping 29.99 percent default rate.

Worse, if you pay late or go over the credit limit on another account or loan you have with the card issuing bank and its subsidiaries, you could also be hit with a 29.99 percent default APR.

Some card issuers also reserve the right to apply the default APR indefinitely to all the outstanding balances and future charges to that credit card account. (The defaults terms and how strictly they are applied vary from card issuer to card issuer. Before applying, call the card issuer to make sure you understand the details of the default rates and when they are triggered.)

A convenient — but risky — funding source
Because business credit cards offer such a convenient resource for a short-term loan, plenty of small business owners still use them as a financing source. However, this often gets them into trouble.

According to Jean Kruse, a counselor with the nonprofit business coaching association Score in Cedar Rapids, Iowa, it’s not unusual to see small business owners end up over their heads in credit card debt because they used credit cards for financing their start-up.

“Business credit cards are very convenient, and many people just pay the minimum due each month,” says Kruse. “But if you are charging $5,000 a month on a high interest card and paying just the minimum, you just keep getting further and further into debt. It’s only a matter of time before that kind of debt load starts dragging down your business.”

Another downside, according to Kruse, is that people treat business cards as a line of credit and don’t have a clear plan for how quickly they will pay off the loan. With regular small business loans, the monthly payment required is designed to have loans paid off within a five-year period or so. However, with credit cards, the required payment is very low, so many people just keeping carrying high-interest debt forward.

That said, business credits cards can still be a useful tool for small businesses — if they’re used judiciously.

“Where business credit cards really work is when you can pay off the balance in a reasonable amount of time,” says Kruse. “But have a plan in place. If you can’t pay off the balance in full each month or within a couple of months, don’t do it. You don’t want to build up a huge amount of credit card debt you can’t pay.”

When to take advantage of a promotional offer on a business card
For a cash-strapped small business owner, getting an easy, interest-free loan may seem like the answer to your prayers. But before jumping on a promotional offer such as a 0 APR balance transfer, ask yourself the following questions:

  • Do you have a business with an established, predictable cash flow?
  • Will you or whoever manages your account be able to make all payments on that credit card and any other loan accounts you may have with that bank on time, all the time? (When answering this question, consider holidays, vacations and other unusual times when it’s easy to make a slip-up.)
  • Will you be able to pay off the balance in full before the 0 APR offer expires?
  • If, for unexpected reasons, the 0 APR balance jumps to a default APR, do you have another recourse for paying off the balance?

If you can answer yes to all of these questions, promotional offers on business credit cards can be a smart addition to your financing mix.

However, because of their high interest rates and volatile terms, business credit cards should be avoided if you are just starting a business and don’t yet know how much money you will have coming in to pay off the balance.

Business credit cards should also be avoided if your business is not yet producing enough income to meet your expenses. In that case, chances are that turning to a business credit card to fill the gap will create more problems than it solves.