The new credit card rules, which stepped into effect at the end of February, introduce a number of important new protections for consumers. Unfortunately, the new rules exclude one of the parties that need the new protections the most: small businesses.

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.

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.

]]> 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 By Eva Maria Norlyk

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.

Despite the economic stimulus package, credit markets continue to be tight, particularly for small businesses. According to a survey by the National Small Business Association, 42 percent of small business owners polled reported being unable to get the financing needed for their business operations. That’s an increase from 33 percent in December of 2008.

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.]]> By Eva Maria Norlyk

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.

Small businesses are the life blood of U.S. business. There are almost 28 million small businesses in the U.S., and together they account for about half of the U.S. gross domestic product. More than half of Americans at work are employed by a small business with less than 100 employees; and all in all, small businesses employ 116 million workers in the U.S.

Unfortunately, in the current credit environment, small businesses are being hit pretty hard. Traditional sources of funding, such as bank credit lines or small business loans are harder to come by, because small businesses are traditionally considered more risky. A fall-out from the credit crunch is that more than half of small business owners are experiencing difficulty getting the loans they need, according to a 2008 survey from the National Business Association.

Not surprisingly, with credit tightening elsewhere, small business owners are turning to credit cards to fill the gaps. According to the National Small Business Association, credit card usage among small business owners almost tripled from the 1990’s to 2008, from 16 percent to 44 percent. Today, more than one third of small business owners have more than $10,000 in credit card debt and 13 percent have more than $25,000.

Unfortunately, business owners who rely on credit cards to finance business purchases or operations may one day wake up to find that they made a pact with the devil. For starters, interest charges are often double those offered by more traditional sources of financing. Worse, as many business owners are discovering, credit card debt is more unpredictable than the weather. Credit lines can be slashed, interest rates hiked, and minimum payments raised with just a couple of weeks notice.

And now, as credit card lending criteria are being tightened, many small business owners find themselves in a double bind. Not only are traditional sources of funding harder to come by, credit cards are becoming an increasingly questionable source of debt financing as well. According to a survey by the Federal Reserve, 60 percent of banks are reigning in credit card practices. Card issuers are not just being more selective about issuing new credit cards, they are raising interest rates, lowering card limits and even shutting down credit cards for some customers. For small business owners, this can easily turn into a credit card Catch-22, in which the rising cost of credit card debt makes it harder to meet obligations, which leads to even tighter credit, making it harder to keep the business running and produce the income needed to meet debt obligations.

In short, with credit card companies much more risk-adverse, using business credit cards as a source of financing is far more perilous than it used to be. Credit tightening is expected to continue for some time, and even business owners with great credit are not spared. In the current financial environment, business owners are better off looking to other sources of financing.

Also see: Beware of This Business Credit Card Catch-22

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.

Many small business cards also give you the option to download your statement into business accounting software, such as Quicken or Quickbooks. This not only simplifies your book-keeping, it also gives you a tool for monitoring your expenses on a more frequent basis, so you don’t wind up with surprises at the end of the month.

Most small business cards give you the option to request additional cards for employees. This is particularly useful if you have many employees, as it enables you to consolidate your business expenses into one account. Your monthly account summary can be broken down by employee, category of expense, and date. This bypasses the need for employees to write up monthly expense reports and send in invoices for reimbursements, saving your business tedious and expensive paperwork. You can even use a small business credit card in conjunction with expense reporting software to enable employees to view and approve charges before submitting them online for approval.

The best news is that these additional features come free with your card offer. No matter the size of your business, a small business credit card provides you with greater flexibility in managing your company’s credit card expenditures.

The frequent flyer miles you accumulate on your business expenditures can be leveraged to save a lot of cash if you use them to upgrade a coach ticket to business or first class. These miles can also be extremely useful if your business entails unanticipated travel, since late bookings are often at exorbitant rates. Your accumulated miles might help you avoid this high cost; you will often be able to book a last-minute ticket using your miles. Also, some routes are more expensive than others, and accumulated miles can save the day here as well.

Many of these cards also award you double miles on certain purchases, such as those made on wireless phone bill payments, in office supply stores, car rental agencies, gas stations and home improvement and hardware stores.