Credit Cards

Table of Contents

1. How can I use credit cards to finance my business?

2. Who's this good for?

3. When is this the best choice for me?

4. When is this not advised?

5. Tips for getting approved.

6. Ingredients you'll need on hand.

7. Rhonda's Tips.

8. Watch out for!

1. How can I use my credit cards to finance my business?

Lots of small and medium-sized businesses use credit cards as defacto lines of credit, albeit very expensive ones -- to pay for everything from soft drinks for the lunchroom refrigerator to round-the-world travel for execs on trade missions. Some banks issue credit cards especially for business use, although entrepreneurs often use personal credit cards to finance start-ups. "Checks" drawn against credit cards can enable you to charge payments to suppliers, contract workers, or others who wouldn't normally accept credit card payments. Be wary though -- financing your business by piling up credit card debt is costly -- consider cheaper options, like home equity lines or regular bank loans first.

2. Who is this good for?

Tales of steely-nerved entrepreneurs who racked up as much as $100,000 on multiple cards -- even paying employees with cash advances from their cards -- are legendary though awfully scary. But even financially prudent folks use credit cards to get over a financial hump, pay for a much-needed piece of equipment, or come up with a prototype for a product that must get to market quickly. They're good for people who are either:

• New in business and can't get other credit:

• Manage finances carefully:

• Owners of an existing business who want to keep track of expenses;

• Owners who want to give employees a way to charge expenses;

• Business travelers: since rental cars, most hotels, and some airlines require credit cards.

3. When is this the best choice for me?

• When you have expenses that will be reimbursed in a short time (a month or two) and won't incur major interest costs;

• When you absolutely need to make a purchase now that you don't have the cash for as a way of paying it off over a number of months or financing it until the income arrives;

• When faced with last minute purchases or unexpected expenses to even out cash flow;

• When you want to enable some employees to make purchases or incur expenses on the company's behalf easily;

• When you need to separate funds, for instance, isolating all travel or entertainment expenses on a certain piece of plastic or putting personal expenses on one credit card and business expenses on another;

• When you want the convenience of not having to write out a business check for a routine expense, such as office supplies.

4. When is this not advised?

Don't use credit cards:

• When you are incurring a large amount of debt with no clear idea of how it will be paid back;

• For large purchases that can better, and more cheaply, be handled by a loan or line of credit;

• As your main, ongoing means of financing all business expansion and development;

• When you have a poor credit history;

• When having a credit card makes you feel like you have an unlimited amount of money at your disposal, and you never think about the costs until the bill comes.

5. Tips for getting approved

• Unsolicited credit card applications may clog your mailbox daily, but you'll need a respectable credit history to get one. Behind every credit card is a lender who's perfectly serious about getting the money back.

• Don't apply for a lot of cards all at once. It will scare off the most desirable credit card lenders, because they'll see all those requests on your credit report.

• Select a credit card that works best for what you're going to use it for and how you'll pay it off. Some cards have higher interest rates but lower annual fees: this is good if you're going to pay off the balance in full every month. Look for lower interest rates, even if there are higher annual fees, when you know you'll only be paying a portion of your total outstanding bill.

• Look at what perks come with the card and whether you'll really use them. Frequent flyer miles sound good, but will you pay a higher interest rate or higher fees to rack up miles you may not be able to use?

6. Ingredients you'll need on hand

• A pen to fill out the application forms that come endlessly in the mail;

• A clean credit history;

• Some creditors require two years tax returns if you're self-employed.

7. Rhonda's Tips

Business Planning Expert Rhonda Abrams offers tips and insights into using credit cards to finance your business.

• Don't incur major debt without having a plan on how to pay it back: "with luck and a prayer" is NOT a business plan.

• It's tempting to believe that if you're able to pay the minimum monthly fees you're handling your debt, but it's still mounting up. Put a limit on how much total debt you'll incur before you cut off your own credit and start paying down the total amount due.

• If you're thinking of starting a business, but haven't done so yet, it might be a good idea to get a few new credit cards or increase your credit limits while you're still employed by someone else. You may be more likely to be approved if you've been in your current job for a few years and have a "steady" income.

• Just be careful not to pile too many cards onto your credit plate -- it will be tempting to fill up on that credit. It could also make creditors nervous; they periodically check to see how extended your credit is. You may find yourself having some cards pulled.

• Another thing to think about if you're about to start a business or your income pattern may change: get cards with lower interest rates even if they have higher annual fees. You may be used to paying off the total amount due with a regular salary, but that may not be possible when you're self-employed, especially in the early months or years. Lower interest rates may be more important to you now.

• Every business I've ever worked with has used credit cards in one way or another -- most to help them start their business. So don't be embarassed if you're using plastic as a boost in your early years -- just use it carefully, like the limited valuable resource it is.

• If you're using a personal card, let your spouse know what's going on and what your plan is to pay the debt back. He or she is likely to be even more frightened by the debt accumulating than you are, and it can affect their credit also.

8. Watch out for!

• Every entrepreneur needs emergency cash sometime. But poorly managed, credit card debt can turn into financial junk food, stunting the growth of your company through paying exorbitant interest rates. And getting in over your head with credit cards can tarnish your credit history and make it harder to qualify later for loans from banks and other lenders.

• Really high interest rates, which typically range from 15 to 22 percent -- regardless of the prime rate. (Be sure keep track of the interest you're paying on business expenses put on plastic and deduct it just like any commercial loan when you figure out your income taxes.)

• The right hand not knowing what the left hand is doing. If several employees have cards on which they're charging business expenses, or even their own cards under your corporate account, you could end up with a shock when the statement comes.

• Beware of mixing personal and business expenses on the same card. Get a second card, even if it is from the same bank, to simplify bookkeeping and make sure that you aren't accidentally charging the company for personal expenses.

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