Many small business owners have business credit cards they use to run their operation. However, many small business owners also mis-manage these accounts by using them improperly. This can jeopardize their ability to expand in the future, as well as cost them significant interest expenses.
As an overview, Business credit cards are considered revolving debt. This means they are unsecured and considered high risk debt by funding sources. An example of secured debt would be a conventional home mortgage…your house is the asset backing the debt. Before the credit crisis unsecured debt wasn't considered a big problem. Housing was stable and business owners were making their payments. However when the credit markets tightened, many business owners with more than $10k in credit card debt went from being consider bankable to being considered high risk.
For example, 2 years ago I had a client that needed a small amount of equipment to expand their operation. Since it was quick and easy, they put their $15,000 equipment acquisition on a low-interest credit card instead of taking the time to look for competitive funding. Their thought process was that in a year they would be able to pay off the card from future earnings.
They contacted me this week, as they had a piece of equipment they were interested in financing that was going to cost them 25k. This was a used piece of equipment that was going to save them 2k per month on their labor costs and help them take a big step in expand their operation. Unfortunately since they put their last acquisition on a credit card, not only have rates jumped substantially but more importantly their debt ratios are considered high risk. Every funding source has declined them simply because they are carrying too much revolving debt despite the fact they have a return on investment of less than a year. To add insult to injury, their credit card limits and existing lines of credit have been cut so they do not have any alternative source of funds available. They are now forced to scrounge together savings over the next year to try to piece together this equipment acquisition.
In short, no matter how time-consuming, properly managing your debt is crucial to keep your business positioned for the future. Business equipment and other investments that can be financed/leased should never be put on a line of credit or credit card. These are assets that can easily be funded over a longer term, protecting your credit, and acting as a hedge against inflation. Credit cards should be considered a last resort (a parachute for your business should you need emergency access to capital).
There are lots of great , and business financing tools available. Always make sure to check out all of your credit and financing options to make informed decisions that take into account your short term and long term growth plans.