A recent study commissioned by the American Bankers Association suggests that small business credit cards act as important sources of credit for small businesses and help boost new job creation.

The study, which was carried out by the economics and public policy consulting firm Keybridge Research, was based on a nationally representative sample of 4,240 small businesses. Findings suggest that for every 1 percent increase in available business credit card credit, there was a corresponding .051 percent boost in firm employment. The study also found that for every 1 percent increase in business credit card credit, companies saw a .14 percent jump in revenues.

As a result in the increase in revenues and firm employment, the researchers estimate that the business credit card expansion between 2003 and 2008 contributed to the creation of over half a million new jobs in the U.S.

Small businesses play a vital role in the U.S. economy: in addition to representing 50 percent of the country’s total employment and 44 percent of all annual pay, small businesses are one of the fastest growing sources of new jobs. In the past 15 years, 65 percent of new jobs were created through small businesses.

One reason that business credit cards increasingly play a role in small business funding is that, in contrast to other types of business loans, business credit cards afford an easily available source of credit. According to a recent survey by the National Federation of Independent Businesses, only 39 percent of small businesses applying for bank loans get approved for a loan, and only one in three applying for a credit line get offered one with satisfactory terms. In contrast, three out of four applications for small business credit cards get approved.

Despite the benefits, the study notes that the evidence on the net impact of credit cards on business success in the past has been contradictory. While small business credit cards boost revenues and job creation by affording easy access to credit, the sometimes high carrying cost of credit card debt as well as uncertainty of terms may increase the risk of business credit card use.

In the wake of the 2008 credit crisis, more and more businesses have had to turn to business credit cards to fund their business operations: A 2009 survey by the National Small Business Association showed that 59 percent of small businesses use credit cards to meet their capital needs, and more than one-third of small businesses obtain 25 percent or more of their overall debt financing from credit cards.

The main benefits of business credit cards may derive from the fact that they provide businesses with access to credit where no other types of credit are available. The study did not address whether gaining greater access to more traditional form of business financing might ultimately prove equally or more beneficial for small businesses.

Overall, the study concludes, small business credit cards provide important economic benefits by allowing firms not only to borrow funds long term, but also to stretch out their funds, manage monthly expenses, and more efficiently allocate funds. In the continuing tight credit climate, business credit cards can mean the difference between making it or breaking for small business owners with no other recourse to credit for financing business operations.

When it comes to selecting the best business credit cards, the fine print is king. Most business credit cards offer similar introductory terms, such as 0% APR on balance transfers and purchases. However, the details of the card terms often reveal surprising differences.

Significantly the consumer protections of the new Credit CARD Act do not apply to business credit cards. As a result, business credit card issuers still can, and many do, levy harsh penalties on business cardholders. In extreme instances, a late payment can trigger default penalty rates as high as 29.99% APR on existing balances.

To help small business owner navigate through the choppy sea of business credit card offers, here are our picks for the best business credit cards of 2010:

For Business Cardholders Who Don’t Carry a Balance

Capital One Venture for Business
For business owners who want to leverage business expenses to earn rewards, Capital One’s Venture for Business card offers one of the best rewards credit card programs out there. Cardholders earn two miles for every dollar spent—twice what many other programs offer. Rewards earnings can be redeemed not just for free travel, but for cash back, car rentals, hotel stays, gift cards, and other rewards as well.

The miles earnings translate into a straight 2 percent rewards earnings for every dollar spent. Miles earnings can be put towards any airline at any time, with no expiration dates or limitations on the number of miles that can be earned. The redemption value for cash back redemption varies, however, and according to Capital One customer service representatives, is based on each cardholder’s individual credit rating.

Capital One currently offers 10,000 sign-up bonus miles to business cardholders who spend $1,000 in the first three months, and an additional 5,000 miles for signing up additional cardholders within the first 60 days. The card’s $59 annual fee is waived the first year.

An added benefit of the card for frequent overseas travelers is that Capital One does not charge foreign transaction fees on overseas purchases; these fees run upwards of 3 percent for most other card issuers.

For Business Owners Looking for a 0% APR Balance Transfer

Chase Ink with Ultimate Rewards
For business owners looking for short-term 0% APR financing—Chase’s Ink with Ultimate Rewards card offers 0% APR on both new purchases and balance transfers for the first six months with a balance transfer fee of 3%. After the end of the promotional period, cardholders pay an APR ranging from 11.24% to 17.24% variable, depending on creditworthiness.

The Chase Ink Ultimate Rewards card also offers rewards at a rate of one point per dollar spent. Rewards earnings can be used towards travel, shopping, entertainment, and more. Ink holders can earn double points on travel booked through the online “Ultimate Rewards Travel Booking Tool,” and 10 points per dollar on purchases made though the “Ultimate Rewards Mall.” There are no expiration dates or limits on points accrued.

Cardholders will want to stay on their toes with this card, however. Making a late payment, exceeding the credit line, or having a payment bounce may result in a 29.99 % default APR on the existing card balance. The default rate will also be triggered if cardholders make any of the above transgressions on other accounts held with JP Morgan Chase-related companies.

Best Business Credit Cards for Carrying a Balance

For business cardholders who wish to carry a balance from month to month, Bank of America business credit cards offer a unique advantage. Unlike other card issuers, Bank of America has pledged that it will apply the new rules of the Credit CARD Act for the bank’s business credit cards as well.

This means that Bank of America business cards, such as the Platinum Plus for Business MasterCard, unlike other business cards, should offer protection from retroactive interest rate hikes as well as 45 days notice prior to rate increases on future purchases.

The BofA business credit cards currently feature some of the lowest APRs in the industry. The regular APR weighs in as low as Prime + 5.99% for people with good credit. The APR increases with declining credit scores; cardholders with not so great credit can expect to pay interest rates as high as Prime plus 16.99%. Both the Bank of America Platinum Visa for Business and Platinum Plus for Business MasterCard come free of annual fees and currently offer 0% APR intro on purchases for 6 months.

The cards come with the usual additional benefits of business credit cards, such as free employee cards with controllable spending limits, monthly employee spending reports, and, as an extra perk, Employee Misuse Insurance Protection.

Most credit cardholders could breathe a sigh of relief as the last consumer protections of the Credit CARD Act of 2009 stepped into effect at the end of February this year. Business cardholders, however, were left holding credit cards with the same old rules. For seemingly inexplicable reasons, Congress did not include business credit cards in the changes introduced with the new credit card law.

Now, however, business credit cardholders may be pleased to know that some credit card issuers have voluntarily decided to extend some of the new consumer protections to small business owners as well.

For example, beginning in May, Bank of America’s 2 million small business cardholders will enjoy the same freedom from retroactive rate hikes that their personal credit cardholders do. In addition to eliminating rate increases on existing balances, Bank of America will also provide business credit cardholders with 45 days’ advance notice on rate changes for future purchases and a minimum 25 day period between statement closing date to payment due date. Small business cardholders who carry accounts with Bank of America will also be pleased to see the issuer has laid over-limit fees to rest.

Bank of America, while on the forefront of elective business credit card policy changes, is not the only card issuer venturing into the new terrain; American Express and JPMorgan Chase have also updated policies and protections for business cardholders to bring business credit cards more in line with personal credit cards. Last August, American Express, in addition to cleaning up its statements and adding late payment warnings, set fixed billing cycles for its business cardholders. The issuer also extended same day processing to 5 p.m. Likewise, JPMorgan Chase set fixed statement dates and lengthened payment processing times. As the competition among credit card companies for consumers with good credit heats up, more card issuers may well follow suit.

Some analysts suggest that the greater protections could mean that the business card market could indeed be headed in the direction of greater exclusivity. However, Bank of America refutes this notion: the issuer recently stated that it is committed to increasing small- and medium-sized business lending by at least $5 billion this year.

Many small businesses, particularly start-ups, often rely on business credit cards to fund costs and bridge gaps in cash flow. In the wake of the continuing credit crunch, even established small businesses have increasingly begun to rely on credit cards. Credit card usage of small businesses jumped from 49% in December of 2008 to 59% in April of 2009, and while this was at the height of the credit crisis, other sources of funding for small businesses remain tight.

Like consumers, businesses need to be able to know which interest rate they will be paying on credit card balances in order to make decisions about cash flow and how much debt to take on. For businesses, this is perhaps even more vital, since business credit cards generally come with higher lines of credit, and small businesses tend to carry higher balances on their business credit cards.

Unfortunately, some of the key protections of the new law are for consumers only. The new law protects consumers against retroactive interest rate hikes on their credit card balances. Card issuers can only raise interest rates on new charges, and they have to give cardholders at least 45 days notice of the increase and the right to opt out.

For business credit cards, however, these rules do not apply. If a business owner puts a large balance on a card with an attractive interest rate of say 6 percent, that rate could double or even triple tomorrow, and the cardholder would have no protections against it. Worse, as card issuers see profits decline as a result of the new consumer credit card rules, they may be tempted to increase interest rates and tighten other terms on business credit cards to make up for the difference.

Business card users also will not be able to enjoy another important new credit card protection introduced by the new law: fairer payment allocation. In the past, all credit card payments have been applied to the balance with the lowest APR first, making it impossible for cardholders to knock off high-interest balances without paying off the card in its entirety.

That all changed under the new Credit Card ACT, which stipulates that any payment amount over the minimum must be allocated to pay off the highest-rate balance on the card. Business credit cards, again, are excluded from this rule. For example, a business owner who takes out a 0 percent APR balance transfer of $5,000 on a business credit card, and then accumulates $10,000 in new purchases at a 19.99 percent interest rate, will end up paying 19.99 percent interest on the entire $10,000 balance until the $5,000 has been paid off in full.

Other differences apply, and for small business owners using both business credit cards and consumer credit cards for personal expenses, it can be confusing, to say the least, to keep track of the differences between the two types of cards and easy to overlook the added risks of business cards.

And unfortunately, while it might seem like a good solution to simply use a personal credit card for business expenses, most experts advise against this practice. Firstly, it might void the business owner’s ability to deduct interest expenses or annual fees on the credit card; worse, it could put the company’s corporate structure at risk. Further, any balance carried on a personal card for the business would weigh down the cardholder’s credit score.

And unfortunately, while it might seem like a good solution to simply use a personal credit card for business expenses, most experts advise against this practice. Firstly, it might void the business owner’s ability to deduct interest expenses or annual fees on the credit card; worse, it could put the company’s corporate structure at risk. Further, any balance carried on a personal card for the business would weigh down the cardholder’s credit score.

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.

]]> ~ ~ ~ ~ http://www.creditcardguide.com/creditcards/business/9-tips-business-credit-cards-tight-economy-150/feed/ 0 http://www.creditcardguide.com/creditcards/business/business-credit-card-debt-hurt-helps/ http://www.creditcardguide.com/creditcards/business/business-credit-card-debt-hurt-helps/#comments Sun, 18 Oct 2009 12:00:43 +0000 admin http://www.creditcardguide.com/creditcards/?p=893 More than half a million new businesses are created each year, contributing greatly to the health of the U.S. economy. Unfortunately, the survival rate of business start-ups is not that great. Three out of four make it past the three-year mark, however, less than half (45 percent) make it past the first five years, according to data from the Kauffman Firm Survey.

The most common reason new businesses fail is financial. It is more difficult for start-ups to get access to traditional forms of financing, such as bank loans. Not surprisingly, as a result, many new small businesses turn to credit cards to finance their business ventures. This has become even more so during the recent credit crunch, where even established businesses have faced difficulties in getting credit, not to mention new business ventures.

However, according to a recent study by the Ewing Marion Kauffman Foundation, while business credit cards provide an easily accessible source of financing, credit card debt may be a two-edged sword, possibly hurting small start-up businesses as much as it helps.

The study looked at whether using credit cards for financing had any impact on the survival rates of business start-ups in the first three years of operation. Data from both personal credit cards and business credit cards was included, since most business owners use both, and there is no difference between the two in terms of interest rates and fees. The study looked at credit card usage during the period from 2004 thru 2006, during which period almost six out of ten of the businesses included in the study (58%) used credit cards to help fund their operations.

The study found that while credit card usage in itself wasn’t linked to a business’ survival rate, carrying credit card debt was. According to the study, the survival rate of the businesses included in the study was correlated with the amount of credit card debt carried. For every $1,000 increase in credit card debt, there was a 2.2% increase in the probability that the company would close, compared with companies that had no credit card debt. The higher the level of debt, the greater the likelihood that the new business would fail.

In evaluating the study, it should be born in mind that correlation is not causation. There may be other reasons why higher levels of credit card debt were associated with a higher failure rate. For example, businesses not generating the expected revenue from their operations would be more likely to accumulate more credit card debt and would have more problems paying down existing credit card debt. In such instances, the business failure would be correlated with higher levels of credit card debt. However, there is no telling whether the real cause of the failure was the inability to generate sufficient business revenue, the burden of expensive credit card debt, or a mixture of both.

Still, there is no arguing that credit cards have numerous disadvantages as a source of financing. Credit card debt is generally more expensive than a bank loan, and worse, they are an extremely unreliable source of financing. The terms of small business credit cards can change at any moment: credit lines may get slashed, interest rates hiked, and monthly payments doubled or more. All of these factors make financial planning difficult and cause businesses relying on credit cards for financing to be more unstable and vulnerable. And, while the recent Credit CARD Act of 2009 introduces new protections for consumers, none of the new provisions apply to small business credit cards.

This is even more so the case in today’s economic environment of steadily tightening credit card interest terms. Unfortunately, at the same time, a shortage of funding is making even more small business owners rely on credit cards to fund start-ups or existing operations.

For small business owners with little other recourse than financing operations in part or completely through credit cards, the study is a sobering reminder to navigate carefully through the murky waters of credit card debt.

Traditionally, start-up businesses are known to turn to business credit cards to fund new ventures. However, even established small businesses increasingly rely on credit cards. According to the 2009 Small Business Credit Card Survey, credit card usage of small businesses jumped from 49% in December of 2008 to 59% in April of 2009. Less than half of the businesses involved in the survey were start-ups; 56% of the businesses included in the survey had been in operation for 16 years or more.

The rise in credit card use is happening despite continuously worsening terms. Almost eight out of ten business owners (79%) said that their credit card terms had worsened within the past five years. Within just the past year, 41% of respondents had seen their credit limit reduced, 63% had seen their interest rate increase, and 23% had had their interest rate changed from fixed to variable.

One third of business owners used credit cards to fund up to 25% of their business; the remaining used credit cards for a smaller percentage of funding. Credit limits were high, ranging from 20K to over 100K for 84% of respondents, with more than half (53%) having a total credit limit of more than 50K.

Only 40% of small business owners reported paying off their credit cards each month, down from 50% in December of 2008. 37% of respondents carried a balance of more than 10K on their cards. Almost half of respondents paid more than 15% interest rate on their cards with one out of five paying 20% or higher.

The growing credit card usage among small businesses is not just a reflection of the economy, but also increased marketing efforts to attract small business customers. According to industry researcher Mercator Advisory Group, credit card companies send out about 720 million offers for small business credit cards each year, or about 12% of the 6 billion credit card offers sent by mail annually.

The business credit card market continues to be viewed as a major growth area for banks, who desire a bigger share not just of the small business lending market, but also a larger share of the close to five trillion dollars small businesses spend each year on supply purchases and other operation-related expenses.

]]> ~ ~ ~ ~ http://www.creditcardguide.com/creditcards/business/companies-turn-business-credit-cards-funding/feed/ 0 http://www.creditcardguide.com/creditcards/business/changing-landscape-small-businesses-credit-cards/ http://www.creditcardguide.com/creditcards/business/changing-landscape-small-businesses-credit-cards/#comments Wed, 02 Sep 2009 14:29:57 +0000 admin http://www.creditcardguide.com/creditcards/?p=748
The sharp increase illustrates just how many small businesses have been forced to turn to credit cards because other sources of funding have dried up.]]> For many small businesses, credit cards have become an important means of financing day-to-day operations, particularly in the current tight credit environment. The percentage of small businesses using credit cards to manage cash flow increased from 44 to 59 percent in the four months from December 2008 to April 2009 alone, an almost 33 percent increase.

The sharp increase illustrates just how many small businesses have been forced to turn to credit cards because other sources of funding have dried up. Unfortunately, there are numerous signs that the tightening credit environment is spilling over into business credit cards as well. Here are the key changes to the business credit card landscape and what they mean for small business owners going forward.

Drastically reduced credit lines. According to the New York Times, as much as 75% of small business owners have seen their card limits slashed within the last six months. Unfortunately for many business owners too busy to read the fine print on their credit card statement, the first they know about the reduced credit limit is when the company’s small business card gets denied.

Aggressive interest hikes. Many small businesses have seen their interest rates hiked over the past six months, often to a dizzying 25-30% APR. And while credit cardholders in general can breathe a collective sigh of relief when the new laws regulating interest rate increases goes into effect in August 2010, unfortunately, the changes don’t extend to business credit cards.

This could turn into a double whammy for small business credit cards. Not only are business credit cards left out of the protections against retroactive interest hikes going forward, they are likely to be included in the steps credit card companies will be taking to protect themselves before the new legislation steps into effect in 2010. Card issuers can be expected to step up the efforts to increase card APRs on existing balances before the new laws limit their ability to do so. Although small business credit cards technically won’t be protected against interest rate hikes by the new legislation, expect them to be swept up in the wave of increasing interest rates across the board.

Less Financing Flexibility. For the past several years, credit card companies have been handing out business credit cards with generous credit lines for little more than the asking. In the current environment, however, card issuers are taking a particularly close look at small business cards because of higher-than-average default rates in this segment of the market. According to The Nilson Report, the delinquency rate among small business credit cards is currently more than 12 percent, about two percentage points higher than for consumer credit cards.

As a result, the days where a small business owner could get approved for a business credit card with a $20,000 limit within 30 seconds of applying for it online are over. Expect it to be much more difficult to get approved for a small business credit card going forward, and expect the card to have a lower initial credit limit.

The take home lesson: Despite their ease of use, business credit cards come with too much inherent risk to be relied on as a significant source of financing. This has always been the case, but it will be even more so going forward. With small business credit cards, a business owner will never know for sure how much of a line of credit the business has to rely on, nor what the interest will be because both can change at any moment.

As millions of small business owners across the U.S. are discovering, no one can operate a small business with that kind of uncertainty about what sources of financing will be available and what it will cost. To avoid falling victim to the changes ahead, business owners would be wise to avoid the most common mistakes of credit card usage, while also taking proactive steps to seek other sources of financing.

Credit cards have long provided an easy avenue for entrepreneurs to fund start-up ventures, from businesses to movie productions. Google founders Larry Page and Sergey Brin are reported to have used credit cards to help finance their first purchase of computers and office equipment. Filmmaker Robert Townsend came up with $40,000 of the movie Hollywood Shuffle’s $100,000 budget by charging expenses to ten credit cards.

The list goes on. According to a 2008 survey by the National Small Business Association, credit cards are one of the main sources of funding for small businesses. A full 44 percent of small businesses reported having used credit cards to fill in their capital needs. The smaller the company, the greater the reliance on credit cards.

Credit cards have many obvious advantages as a source of business funding because of the easy access to cash they offer. When in need of capital for emergency purchases or a cash infusion to prevent cash flow problems, credit cards offer an easy way to tide small business owners over until other funds come in.

Business credit cards are specifically tailored to the meet the needs of businesses and they offer some additional advantages over personal credit cards.

• Business credit cards come with a larger credit line. It is not unusual for an initial credit line on a business credit card to start at $15,000 or higher, reflecting a business owner’s need to charge more than regular consumers. Some business charge cards don’t carry spending limits at all.
• Business credit cards simplify accounting. Having a separate business credit card for business expenses makes it easy for small business owners to keep business and personal expenses separate, an essential accounting practice. By charging business expenses to a credit card, expense accounting can be done instantly by simply downloading the card info from the card issuer’s website into accounting software. The software will even assign expense categories, removing much time and hassle from basic bookkeeping tasks.
• With business credit cards, it’s easy to put curbs on employee expenditures. Small business owners can get additional cards for employees to simplify the management of employee expenditures. Business owners can then set spending limits for each employee and even specify which categories of expenditures are allowed.
• Business credit cards make it easier to keep track of spending. Knowing where your money goes and staying on top of day to day expenditures is important. By using a business credit card for both general business expenditures and employee expenditures, all transactions will be in one place, and easily accessible in online.
• Business credit card perks don’t hurt either. Most business credit cards come with additional perks and rewards, such as free travel points, a statement credit, gift cards, free merchandise, and more. And of course, when employees’ expenditures are charged to the business credit card as well, rewards can quickly add up.

Despite all the benefits, using credit cards to help finance a small business venture has one big downside: Credit cards offer a very volatile source of financing. With credit cards, the rules can be changed at any time, for any reason. Credit limits can get slashed, interest rates increased, and minimum payments doubled.

In short, small business owners should be wary of relying on business credit cards as a significant part of business financing, particularly in today’s financial climate. Still, when used wisely and with caution, business credit cards can be an important ally for a small business.